INNOFACTOR Software/, June 2, 2017 Company report

Target: Leader in all Rating BUY

We initiate coverage of Innofactor with “BUY” 1,8 recommendation and target price of EUR 1.85. Innofactor’s 1,6 acquisition driven growth phase is shifting towards a focus on 1,4 organic growth and improving margins. The outlook for the 1,2 Nordic IT-services market is healthy and improving economic 1 0,8

conditions support growth. Price/EUR 0,6 Microsoft growing, especially in cloud services 0,4 Microsoft’s strong position in enterprise solutions in combination 0,2 with a growing fragmented multibillion market provides a good 0 opportunity for Innofactor. Microsoft’s sales in global enterprise 06/12 06/13 06/14 06/15 06/16 06/17 solutions are estimated to grow at around 10 % 2018-2020E. Innofactor DJ STOXX 600

Shift from acquisition driven growth to organic growth Share price, EUR (Last trading 1.67 Innofactor has grown aggressively through acquisitions during day’s closing price) the past years, which has had an effect on profitability. The Target price, EUR 1.85 company has now built a pan-Nordic platform from which it Latest change in 2-June-17 aims to grow organically and focus on improving its profitability. We estimate Innofactor to grow at a 5.6 % CAGR between 2018- Latest report on company -

2020E. Research paid by issuer: YES No. of shares outstanding, 36,188 Synergies and mix to improve margins No. of shares fully diluted, 36,188 A key driver for improving profitability lies in Innofactor’s ability Market cap, EURm 60 to transition sales from low margin projects to higher margin Free float, %EUR 34.8 continuous services and to a greater extent being able to include Exchange rate - own software products and services in the offering. In addition Reuters code IFA1V.HE to the aforementioned, the company can achieve some cost Bloomberg code IFA1V FH synergies on group level from streamlining operations after acquisitions. We estimate the EBITDA-margin to reach 10 % in Average daily volume, EURm - 2018. Next interim report 01-Aug-17 Web site www.innofactor.fi We initiate coverage with “BUY” rating and TP of EUR 1.85 Our target price and recommendation is based on our DCF Analyst Jerker Salokivi, Jonas Forslund valuation and peer multiples. Our EV/EBITDA estimate of 11.0x E-mail [email protected] for 2017 is slightly above our Nordic peer group but our 2018 Telephone multiples are in line with peers. The value from our DCF model BUY HOLD SELL and the multiples imply a target price of EUR 1.85. KEY FIGURES

Sales EBIT EBIT Ptx profit EPS P/E EV/Sales P/CF EV/EBIT DPS EURm EURm % EURm EUR (x) (x) (x) (x) EUR

2015 44 3 5.7% 2 0.04 26.0 1.0 8.3 17.4 0.00 2016 60 2 3.9% 2 0.04 25.8 0.9 11.2 23.3 0.00 2017E 70 4 5.5% 3 0.07 22.5 1.0 47.5 18.7 0.00 2018E 75 5 7.1% 5 0.11 15.5 0.9 11.2 12.8 0.00 2019E 79 6 7.8% 6 0.13 13.0 0.8 11.7 10.0 0.01

Market cap, EURm 60 BV per share 2017E, EUR 0.8 CAGR EPS 2016-19, % 42.2 Net debt 2017E, EURm 12 Price/book 2017E 2.0 CAGR sales 2016-19, % 9.9 Enterprise value, EURm 72 Dividend yield 2017E, % 0.0 ROE 2017E, % 10.3 Total assets 2017E, EURm 65 Tax rate 2017E, % 20.0 ROCE 2017E, % 9.4 Goodwill 2017E, EURm 28 Equity ratio 2017E, % 45.5 PEG, P/E 17/CAGR 0.9

All the important disclosures can be found on the last pages of this report.

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EVLI EQUITY RESEARCH INNOFACTOR Software/Finland, June 2, 2017 Company report

Investment summary

Leading Nordic Microsoft Innofactor is a leading Nordic IT-services company. The company’s core business is being solutions provider an integrator of Microsoft based solutions and the company has a leading position in the Nordic countries within its focus area. Innofactor also develops and sells own software products and solutions. Customers include commercial, public sector, and membership- based organizations in the Nordic countries. Innofactor employs 600 people and has offices in Finland, , , and .

Growth outlook for IT- The growth in the Nordic IT-services market during 2016 has been estimated at around services market improving 2-3 % and the growth is expected to pick up in 2017, with Innofactor estimating growth of around 3-4 %. The growth in certain areas within IT-services, such as the cloud, mobility, and analytics, are assumed to notably surpass the upper end of the estimated growth spectrum. IDC has projected an annual growth of 21 % in the Nordic public cloud services market until 2020.

Microsoft’s enterprise Microsoft’s strong position in enterprise solutions in combination with a growing solutions growing, fragmented multibillion market provides a good opportunity for Innofactor. Microsoft’s especially cloud services sales in global enterprise solutions are estimated to grow at around 10 %. Microsoft is also at the forefront of developing A.I., machine learning and advanced analytics capabilities into its solutions, which provides a tailwind to service providers like Innofactor.

Shift from acquisition Innofactor has grown aggressively through acquisitions during the past years, which has driven growth to organic had an effect on profitability. The company has now built a pan-Nordic platform from growth and margin which it aims to grow organically and focus on improving its profitability. We estimate improvement Innofactor to grow at a 5.6 % CAGR during 2018-2020E. Our sales growth estimates are based on the healthy outlook of the Nordic IT-services market and the aforementioned growth pockets within the market (e.g. cloud and digital leap), improving economic conditions favoring increased IT-investments, and the strong outlook for Microsoft’s enterprise solutions.

Synergies and mix to A key driver for improving profitability lies in Innofactor’s ability to transition sales from improve margins low margin projects to higher margin continuous services and to a greater extent being able to include own software products and services in the offering. In addition to the aforementioned, the company can achieve some cost synergies on group level from streamlining operations after acquisitions. We estimate the EBITDA-margin to reach 10 % in 2018.

Main risks to investment The main risks to our investment case are Innofactor failing to 1) improve mix between case projects and recurring revenue (including own products) 2) achieve planned synergies 3) to attract skilled professionals, and 4) Microsoft losing its leading position in enterprise space.

BUY with target price of Our target price and recommendation is based on our DCF valuation and peer multiples. EUR 1.85 Our EV/EBITDA estimate of 11.0x for 2017 is slightly above our Nordic peer group but our 2018 multiples are in line with peers. The fair value from our DCF model and the multiples imply a target price of EUR 1.85.

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EVLI EQUITY RESEARCH INNOFACTOR Software/Finland, June 2, 2017 Company report

Company and business overview

Leading Nordic system Innofactor is a leading Nordic IT-services company. The company’s core business is being integrator within an integrator of Microsoft based solutions and the company has a leading position in the Microsoft-based solutions Nordic countries within its focus area. Innofactor also develops and sells own software products and solutions.

Leading Nordic system Innofactor’s customers include over 1500 commercial, public sector, and membership- integrator within based organizations in the Nordic countries. Innofactor has offices in Finland, Sweden, Microsoft-based solutions Denmark, and Norway.

Figure 1: Revenue by customers, country, and source (Q1/2017)

Source: Innofactor, Evli

Strong acquisition based As a result of a merger with Westend ICT, Innofactor listed on in 2011. growth The strong growth of Innofactor before the merger has since continued, with an acquisition fuelled sales CAGR of 28.2 % from 2011-2016. Since 2011 seven acquisitions have been made, both in Finland and in other Nordic countries. Revenue in 2016 amounted to EUR 59.6m and the company now has over 600 employees.

Improved geographical Innofactor operates in the Nordic IT-services market. In 2015, before the acquisitions of dispersion, Finland 54 % of Cinteros and Lumagate, Finland accounted for 82 % of sales and Denmark for 18 %. As a sales result of the acquisitions the geographical distribution has changed significantly and in the first quarter of 2017 Finland accounted for 54 % of sales and Sweden as the second largest country with 29 %. Denmark and Norway stood for 9 % and 8 % respectively.

Innofactor SWOT-analysis

Strengths Weaknesses • Pan-Nordic presence • Scalability historically • Strong offering with Microsoft • Project dependency

focus • Risks associated with acquisitions • Growth track record, customer references Opportunities Threats • Increasing share of own products • Competition for skilled workers and services • Increases in personnel costs • Scaling up through better sales mix • Failing to capture synergies from acquisitions • Fragmented market • Failing to improve sales mix • Digitalization trend • Cross selling and business • Microsoft losing its position

optimization

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EVLI EQUITY RESEARCH INNOFACTOR Software/Finland, June 2, 2017 Company report

Business solution areas

Microsoft technology at Innofactor’s core business is being an integrator of Microsoft-based systems. This means the core that the business is very much focused around client projects and project deliveries, as well as consulting. The company’s solutions are divided into five areas, which are described below.

The “Digital Vision and Processes” solution area is focused on consulting work in regards to developing a customer’s operations from a digital point of view.

Digital Business solutions are focused on creating and moving customers’ operations to the web and providing a modern service environment for customers and their end-users. The solutions include: • Service design, Digital marketing, Websites and mobile applications, and Digital customer service Products and platforms include: • Microsoft Office 365, Dynamics CRM, Microsoft Azure, Episerver, and Sitecore

The Business Productivity focus on improvements and integration of business processes. Solutions in the area include: • CRM and xRM, PPM, ERP and Customized Solutions, Information, Case and Quality Management, and Business Intelligence. Products and platforms include: • Microsoft Dynamics 365, Power BI and SQL, Innofactor Business Cloud, and Innofactor Quality First

Flexible Collaboration solutions provide customers with ways of improving accessibility to information, by enabling safe access to information on any device, and enhancing communication. The solutions include: • Mobile productivity, Digital collaboration, and Enterprise communication Products and tools include: • Innofactor OnePoint, Microsoft Teams, Yammer, and Skype for Business

Intelligent Cloud solutions help to create customized cloud services, integrate devices, move data to the cloud, and to improve processing and analysis of data. Solutions in Intelligent Cloud include: • Azure managed services, Enterprise mobility services, Analytics and machine learning, and Internet of Things Platforms and tools include: • Azure, AD, EMS, OMS, and Power BI

Images: Innofactor

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Own software products and services

Own products and services Innofactor also develops its own software products on top of Microsoft’s solutions. improve profitability According to the company, their own products complement their Microsoft based offering and function as a competitive advantage for them. The company’s product and service development organization employs around 40 experts in cloud technology and architecture. The focus lies on productized cloud solutions that are delivered as part of the solutions in Innofactor’s business solution areas. Examples of own products are Innofactor Skilli, Innofactor Prime, and Innofactor OnePoint.

R&D could rise to around In 2016 the company invested 5.7 % of net sales in research and product development. 10 % of net sales The company sees potential to attain more revenue from own products and services and has indicated that investments in research and product development could rise to a level of 10 % of net sales. Excluding R&D costs, the operating margins of the own products are closer to 100 %, thus offering good potential for enhanced profitability.

Limited distribution Most of Innofactor’s own products are sold directly to customers in connection with through third party projects. Some of the more standardized products are sold through third party digital networks distribution networks, but this represents only a small part of the revenue streams. We see limited potential at the moment for Innofactor to increase its digital distribution of own software, unless it would significantly invest in this area.

Own product examples

Innofactor Skilli • Data analytics tool for primary and secondary schools • Enables collection of data and use of the information for planning teaching

Innofactor Prime • Software platform accesed through a browser-based user interface • Scalable solution for online publications, communication and eServices.

Innofactor OnePoint • Mobile and cloud focused package solution • Tool for flexible communication and collaboration in organizations

Revenue and business models

Innofactor operates under one business segment and reports revenue for four different sources. Innofactor sources of revenue:

• Delivery projects and consulting • Recurring revenues – professional services • Recurring revenues – managed services and maintenance • Licenses

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Projects 62 % of revenue from Delivery projects and consulting typically includes assignments where Innofactor projects and consulting integrates a systems solution for the customer. 62 % of revenue in 2016 was created through projects. In obtaining new projects a certain amount of sales activity is generally required, but previous references and customer-specific needs can also lead to direct engagement from the customer. Project pricing is usually based on spent hours or on a fixed price. In fixed price projects there exists a risk that the costs for completing the costs are wrongly estimated and projects become unprofitable. In general the margins in projects are typically quite low partly due to competition in obtaining projects.

Recurring revenues Recurring revenues Recurring revenues are generated through long-term contracts with customers, often increase business stability lasting over 10 years, with payments occuring at pre-specified intervals. Typically the contracts are a result of a project where customers have ordered a product or systems solution and wish to outsource any further development and maintenance needs, as well as support activities, to Innofactor. The continuous contracts decrease the seasonal variation and provide a stability to the business.

Managed services and Recurring revenues are divided into managed services and maintenance and professional maintenance; professional services. Managed services and maintenance concern continuous services and support, services such as SaaS-solutions, support services and customer service. Professional services concerns continuous development and modifications and would likely be based on a certain amount of development hours per time unit. The margins in recurring revenues are higher due to the lower need for sales activity as compared to projects, as well as significantly lower cost base. Margins from managed services and maintenance are generally higher as the need for development work and the therefrom arising labor costs from the hours spent are lower. In some cases operating margins can be closer to 50 %.

Licenses High margin licenses Revenue is also generated through the sale of licenses, both own and third-party. roughly 5 % of revenue Approximately 2 % of revenue in 2016 was generated through sales of third-party licenses, where Innofactor receives a share of the revenue. Roughly 3 % was generated from own licenses, where the scalability significantly improves profitability. Excluding R&D costs, the operating margins of the own products sold through licenses are closer to 100 %.

Figure 2: Estimated range for average operating margins per revenue source

40 % 35 % 30 % 25 % 20 % 15 % 10 % 5 % 0 % Projects RR - Professional RR - Managed Licenses services serv. and maint. Source: Evli est.

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EVLI EQUITY RESEARCH INNOFACTOR Software/Finland, June 2, 2017 Company report

Acquisitions

Acquisitions since 2011 Innofactor has since 2011 made seven acquisitions, of which the most significant added EUR 35-43m to acquisitions by size have been atBusiness, Cinteros, and Lumagate. We estimate that the revenue acquisitions since 2011 have added revenue in the range of EUR 35-43m. With the effect of acquisitions taken into account, we estimate organic growth of between 3.5-7.5 % for 2011-2016.

Innofactor nearly doubled its size in 2013 after acquiring Finnish company atBusiness. The company was at the time one of the leading providers of Microsoft-based technology solutions to commercial and public sector clients with over 200 employees. The deal expanded Innofactor’s offering in enterprise resource planning and human resource management systems. atBusiness was consolidated into Innofactor June 1st, 2013. The company had revenue of EUR 17.4m in 2012.

In 2015 Innofactor acquired the Swedish company Cinteros, a leading IT services company in Sweden focusing on Microsoft Dynamics CRM-based solutions. The company employed over 100 people in three locations in Sweden. Cinteros was consolidated into Innofactor January 1st, 2016. Cinteros’ revenue in 2014 was around EUR 7.9m.

Innofactor acquired Lumagate group in 2016. Lumagate is a leading Nordic Microsoft Azure and infrastructure services provider, with over 70 employees, focusing on cloud- based solutions in the Microsoft ecosystem. Through the acquisition Innofactor expanded its business to Norway and strengthened its position in Sweden and Denmark. Lumagate was consolidated into Innofactor October 1st, 2016. The revenue in 2015 was approximately EUR 8.7m.

Possible future M&A Company managament has indicated that the M&A activity will slow down at least in activity likely smaller scale the near future. Acquisitions may continue, but the scope is expected to be smaller, with and strategically focused focus on strategic acquisitions that enable unification of country-specific offerings. According to company management this could mean acquisition of for instance CRM and ERP business in Denmark and Norway.

Competitors and competitive landscape

Fragmented market with Through the acquistions of Cinteros and Lumagate, Innofactor now has a presence in all small niche players and of the nordic countries and competes with an increasing number of companies. The large IT-companies generally fragmented Nordic IT services market includes small niche players in addition to mid-sized and large competitors. Size-wise Innofactor is positioned in between the small niche players and large IT-companies.

Large IT generalists The large competitors typically have a presence in all nordic countries or a global presence. These large players are IT generalists, which mean that they offer a vast amount of different IT-services, and have large resources and offshoring capabilities at their disposal. They also do not focus strictly on one technology for providing business solutions, but instead provide solutions from multiple competing platforms. Innofactor does not use off-shoring, instead it relies on local skilled professionals. The large competitors include such companies as Accenture, CGI, Fujitsu, and Tieto.

Mid-sized competitors In the mid-sized firms, competitors consist of both firms with a more local geographic focus and firms with a presence in the Nordic markets. Companies with a more local focus tend to have a broader offering than the geographically more dispersed companies and the mid-sized firms in general do not focus on single platforms. Competitors with stronger focus to one or a few nordic countries include Siili, Solita, Digia, Net-Company, and Precio Fishbone. Competitors with presence in all Nordic markets include Affecto, Atea, HiQ, Knowit, and EG.

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Small competitors The smaller competitors usually have limited their presence to the home market. Their size also limits their possibilities to offer solutions on multiple platforms and as such the companies are often niche players with a focused offering. Smaller competitors include Sulava, Cloudriven, and Proactive.

Figure 3: Innofactor’s competitive positioning

Innofactor’s size provides Innofactor is positioned between the small and large competitors. Compared to the large flexibility competitors, Innofactor competes by being more flexible and offering local skilled professionals. As a listed company with a long customer reference track record, Innofactor is able to compete well against smaller firms. Innofactor’s competitive positioning is described in Figure 3.

Focus on Microsoft Innofactor’s strategic positioning relies heavily on Microsoft-based solutions in addition solutions to a few other complementing platforms. Nordic IT services market is estimated to about 25 billion euros, of which Innofactor estimates that approximately 40% or some 10 billion euros to be related to Microsoft IT-services. According to Innofactor they are the number one Microsoft-based service provider in both Finland and in the Nordics.

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EVLI EQUITY RESEARCH INNOFACTOR Software/Finland, June 2, 2017 Company report

Customers

Over 1500 customers, 10 Innofactor has a dispersed customer base from the commercial sector, public sector, and largest account for 29 % of membership-based organizations, of which the commercial sector accounts for the net sales largest part. The number of customers is over 1500, of which the ten largest customers accounted for 29 % of net sales in 2016.

Figure 4: Innofactor’s customers

Market overview

Market growth expected to The size of the Nordic IT-services market is roughly EUR 25 billion (IDC), of which pick up, public cloud Innofactor has estimated the Mircosoft market to be approximately EUR 10 billion. The services market to growth in the Nordic IT-services market during 2016 has been estimated at around 2-3 experience strong growth % and the growth is expected to pick up in 2017, with Innofactor estimating growth of 3-4 %. We expect the generally improved economic conditions and market trends, such as companies moving increasingly towards cloud-based solutions, to have a positive effect on the growth in IT-services. The growth in certain areas within IT-services, such as the cloud, mobility, and analytics, are assumed to notably surpass the upper end of the growth spectrum. IDC has projected an annual growth of 21 % in the Nordic public cloud services market until 2020.

Growth in Finland In Finland, Innofactor’s largest market in the Nordics, the growth has not been quite as historically weaker, good as in the other Nordic countries. Gartner has estimated the growth in 2016 to be conditions improving 2.2 % and the size of the Finnish IT-market in 2017 to be EUR 6,85 billion, with a growth of 3.1 % (Marketvisio). The IT-services market accounts for roughly 55 % of the total IT- market in Finland. Gartner has estimated the Finnish IT-services market size at EUR 3.8b, growing 4 % in 2016, and growth to increase slightly in 2017 and 2018 (Marketvisio). Growth is expected to be fuelled by areas such as the cloud, mobile solutions and the Internet of Things. The planned Social and Healthcare reform (SOTE) in Finland and the resulting new organizational sturcture on municipality level could provide additional market opportunities for Innofactor.

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Microsoft Ecosystem

Microsoft leading provider Microsoft’s position in the global enterprise solutions space is strong. Microsoft is a in Innofactor’s strategic leading global provider in Innofactor’s strategic focus areas such as Cloud, Analytics, focus areas CRM and ERP. According to Innofactor, if Microsoft were to lose its leading position in some or all of Innofactor’s focus areas, Innofactor could transition to other software partners in these areas.

Figure 5: Microsoft’s position as a provider within Innofactor’s focus areas

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Microsoft sales growing PC’s and PC related products have been weak for a longer time already, but Microsoft’s position in enterprise solutions has been growing thanks to their succesful strategy and execution in areas such as cloud and mobility. Below we have collected the concensus growth estimates for Microsoft’s Productivity and Business Processes and Intelligent Cloud units. Concensus expects MS enterprise solutions to grow at a strong pace, which will be supportive for Innofactor.

Microsoft heavily involved Microsoft is also at the forefront of developing A.I., machine learning and advanced in A.I, cloud, machine analytics capabilities into its solutions, which provides a tailwind to service providers like learning, Internet of Things Innofactor.

Figure 6: Microsoft sales growth estimates per business unit

MEUR 2016 2017E 2018E 2019E 2020E Productivity and Business Processes 25 112 27 155 31 303 34 323 37 547 8 % 15 % 10 % 9 % Intelligent Cloud 23 742 24 474 26 850 29 728 32 712 3 % 10 % 11 % 10 % More Personal Computing 38 360 34 502 34 558 35 002 36 276 -10 % 0 % 1 % 4 % Source: Factset

Strategy and targets

Microsoft focus Innofactor’s strategic focus revolves around the Microsoft ecosystem. A large part of the solutions are Microsoft-based and the company uses other platforms mainly in areas where the Microsoft ecosystem provides limited solutions. By focusing heavily on the Microsoft ecosystem, Innofactor strives to improve its competitive positioning by creating a strong base of know-how and obtaining better deals through the increasing partnership with Microsoft.

Vision: Leading Microsoft- Innofactor’s updated its vision and financial targets in October 2016. As a result of the based solutions provider in Acquisition of Lumagate the company considers itself having reached the previous vision all Nordic countries of becoming the leading provider of Microsoft-based solutions in the Nordics. The vision going forward is to become the leading provider of Microsoft-based solutions in all of the Nordic countries. For the years 2017-2020 the focus has been set on unifying the country-wise offering.

Stronger focus on organic After the strong M&A activity in the recent years the company now has a presence in all growth, room for strategic the Nordic countries a stronger focus on organic growth is to be expected. The acquisitions progressing integration of acquired companies and the freeing up of resources on the group level should have a positive effect on profitability.

Innofactor has set the following financial targets to be achieved by the year 2020:

• Annual organic growth of around 20 percent • 20 percent EBITDA in relation to net sales • Keeping a positive cash flow and securing a solid financial standing in all situations

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2017 guidance: Net sales Guidance for 2017 and EBITDA to increase According to the guidance from Innofactor the net sales and EBITDA are expected from 2016 to increase from 2016 figures. In 2016 the net sales was EUR 59.6 million and EBITDA EUR 4.8 million.

Growth targets well above The financial targets posted for sales growth for the period 2014-2017 was an average expected market growth annual growth of 25-35 % (new targets solely based on organic growth). The previous growth targets were achieved as a result of the strong M&A activity. Innofactor intends to achieve the stronger growth through the following measures:

• Focusing on industries providing highest growth opportunities and scalability in existing offering, e.g. healthcare • Focus on current customers and obtaining larger part of customer’s digital transformation budget through cross sales • Improving modern digital marketing and sales skill to achieve better sales results

Operating margin target The operating margin fell short of the target of 10 % for the period 2014-2017 but was raised from 10 % to 20 % raised to 20 %, to be achieved by 2020. To reach the new target the company intends to:

• Move focus towards own products and productized services • Further develop employee skills to create higher value services that customers are willing to pay more for • Improve the flexible and value-adding delivery model to minimize non-invoiced hours and maximize customer satisfaction • Create operative synergies and cost savings on the Nordic level, e.g. through the currently under implementation Nordic ERP

Aim to pay dividends by Innofactor has previously not paid dividends, largely due to the focus on growth in the 2020 previous strategy. The company has defined a dividend distribution policy in which it aims to distribute the maximum dividend allowed from the part of the operating margin that exceeds 10 %. With regards to the dividend policy and the financial targets the company aims to pay dividends to its shareholders in 2020 at the latest.

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Cost savings and margin improvement

Project profitability A large part of the revenue comes from projects, and we see that a significant part of improvements through revenue will be generated through projects also in the future. As these projects have low controlled project pricing margins but often are necessary for obtaining continuous contracts, the profitability of and keeping costs in line these projects would need to improve for targets to be reached. The two main determinants for the margins are 1) the price at which the project is sold, and 2) how well the project costs are kept in line with the price. Company management has indicated following measures for improving the prices from projects:

• Focusing on segments valuing Innofactors higher value services and on existing key customers • Focusing on selling products and productized services

And for keeping project costs in line:

• Improving pre-project evaluation of project model (Time & Material, fixed, or hybrid price) • Improving processes around and implementation of workload estimates and project planning and using more change management in projects to decrease non-billable work

Strives to achieve synergies The companies that have been acquired more recently have had geographically dispersed from focusing support activities and support functions of their own. With the integration of the companies activities some of these functions will be overlapping with existing ones. Innofactor is seeking to reduce costs in these areas and focusing support activities. This could for instance mean focusing financial administration to one or two countries. Company management has indicated that a reduction of some tens of percent of costs relating to support activities could be achievable. This could translate into total savings of few percentages on the group level. The Nordic ERP system that has already been implemented in some countries will also provide synergies and cost saving potential. The company has employed some 5-10 people for developing the ERP system, and these resources will be gradually released as the implementation progresses.

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Financial performance and estimates

Strong M&A growth Innofactor has been able to grow rapidly while maintaining a relatively stable operating expected to transition margin. As a labour intensive business the revenue development follows the amount of towards organic growth employees quite closely and scalability has been limited. We see a small increase in the and improving margins revenue per employee figures beginning in 2016. We expect the growth to continue at a slower pace with improving margins as focus shifts on integration of acquired companies and achieving cost synergies on the group level.

Figure 7: Revenue and average employees (LTM)

Acquisition related The EBIT-margin since 2013 has been affected by amortizations of intangibles relating to amortizations impact on acquisitions, which in 2016 were EUR 2 million. With an estimated amortization period EBIT of five years the amortizations of previously acquired businesses will decrease gradually from 2018 onwards.

Figure 8: Innofactor’s revenue and margins (MEUR) 90 14% 80 12% 70 10% 60 50 8% 40 6% 30 4% 20 10 2% 0 0% 2012 2013 2014 2015 2016 2017E 2018E 2019E Revenue EBITDA-% Adj. EBIT-% Source: Innofactor, Evli est.

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EVLI EQUITY RESEARCH INNOFACTOR Software/Finland, June 2, 2017 Company report

2017 Q1: Sales increased In the first quarter of 2017 Innofactor’s net sales increased by 20 % Q-on-Q to EUR 20 % and EBITDA 27.1 % 17.5m, affected by the Lumagate acquisition. The operating margin increased by 27.1 % to EUR 1.2m. Operational efficiency was still burdened by the acquisition but according to management the actions taken had a desired effect from March onwards, despite some additional costs related to the actions taken.

Several significant orders Innofactor has during the beginning of the year received several significant orders. received Innofactor reported new orders in the Q1 interim report from HUS (~EUR 1.8m), TVR (~EUR 1.0m) and IF Metall in Sweden (EUR 0.6-4m). An order of approx. EUR 1.2m was also received from HUS in May.

Balance sheet

Large goodwill in assets Goodwill and other intangible assets make up over half of Innofactor’s balance sheet. The intangibles have mainly been obtained from acquisitions and consist of customer relationships and technology. Goodwill is the largest item in the assets stemming from the acquisition driven strategy.

Debt in shape, additional Innofactor has been able to keep the debt at decent levels. Net gearing was 70.2 % in purchase price from 2016, partly due to loans taken to finance acquisitions. The company has been able to acquisitions pay back loans and we expect the debt levels to decrease. The non-interest bearing liabilities contain some liabilities for the additional purchase price of acquisitions. The company has indicated that these compensations would primarily be paid with shares, in which case a share issue may be necessary. The company issued new shares to pay a Cinteros-acquisition related compensation in Q1. The preliminary acquisition cost calculation for the Lumagate conditional compensation is ~EUR 2m, which is intended to be paid in 2019.

Figure 9: Innofactor’s balance sheet composition (2016)

Source: Evli Research

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EVLI EQUITY RESEARCH INNOFACTOR Software/Finland, June 2, 2017 Company report

Estimates

Estimated organic growth Innofactor has estimated a growth rate for the Nordic IT-services market of 3-4 % in of 5-7 % 2017-2019 2017. Gartner has estimated the growth in Finland to be 3.1 % in 2017 (Marketvisio). The Competitiveness Pact signed in 2016 in Finland is also expected to contribute marginally to growth due to the extension of annual working time by 24 hours. Growth within areas in the IT-services market is expected to vary substantially, with areas such as the cloud, mobility, and analytics growing stronger than the market. IDC has projected an annual growth of 21 % in the Nordic public cloud services market until 2020. We estimate 5-7 % growth (2017: 17.8 %, affected by inorganic Lumagate growth) for 2017-2019E. Our estimates are based on the healthy outlook of the Nordic IT-services market and the aforementioned growth pockets within the market (e.g. cloud and digital leap), improving economic outlook favoring increased IT-investments, and the strong outlook for Microsoft’s enterprise solutions

Large margin A key driver for improving profitability lies in the ability to transition sales from low improvements require shift margin project deliveries to higher margin continuous services and to a greater extent from project deliveries being able to include own software products and services in the offering. The Lumagate acquisition also added some new products to Innofactors own products. We expect the competition to keep margins in projects low. We estimate Innofactor to be able to slightly improve the sales mix with an increasing amount of revenue from Recurring Revenue and Licenses. In addition we estimate margin improvement from synergies at the group level. We estimate the EBITDA-margin to reach 10 % by 2018 and further long-term improvement.

Additional purchase price Innofactor has some additional purchase price allocations from the Lumagate acquisition from acquisitions marginal that according to the company would be primarily paid in shares. If the company were to effect on EPS issue new shares in a directed share issue, this would have a diminishing effect on the earnings per share. We estimate this effect to be marginal and the conditional compensation is according to Innofactor estimated to be paid in 2019.

Valuation

BUY with a target price of We initiate coverage of Innofactor with BUY recommendation and a target price of EUR EUR 1.85 EUR 1.85 based on our DCF fair value and the peer multiples.

Relative valuation in line Our DCF model implies a value of EUR 1.9 per share. Our multiples for 2017 are with peers somewhat above the peer group median but are in line with the peer group in 2018. P/E and return on equity figures differ from the peer group due to the additional purchase price from acquisitions in the short term but the P/E multiple improves toward the peer median in 2018. We assign larger weight for our DCF value and give a target price of EUR 1.85.

Valuation Implied value DCF 1,90 DCF diluted* 1,85 Peer EV/EBITDA (18E) 1,60 Peer EV/SALES (18E) 1,75 Target price 1,85 *If conditional compensation financed by directed issue

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EVLI EQUITY RESEARCH INNOFACTOR Software/Finland, June 2, 2017 Company report

Figure 10: Innofactor’s peer group

MCAP EV/EBITDA EV/EBITDA EV/EBITDA EV/Sales EV/Sales EV/Sales P/E P/E P/E Net debt/EBITDA INNOFACTOR PEER GROUP EUR 17 18 19 17 18 19 17 18 19 17 Tieto 2142 11,1x 10,4x 9,9x 1,4x 1,4x 1,3x 17,2x 16,5x 15,7x 0,6x Bouvet 177 9,9x 9,2x 8,6x 1,0x 0,9x 0,9x 16,8x 15,6x 14,5x -0,6x HiQ 331 12,6x 11,8x 10,9x 1,7x 1,6x 1,5x 18,1x 16,7x 15,5x -0,9x Siili Solutions 74 11,1x 9,6x 8,6x 1,1x 1,0x 0,9x 17,6x 15,0x 13,3x -2,3x Atea ASA 1158 9,6x 8,5x 7,9x 0,4x 0,3x 0,3x 17,8x 15,2x 13,6x 0,3x Knowit 264 9,5x 8,8x 8,4x 1,0x 0,9x 0,9x 13,4x 12,0x 11,3x -0,5x Digia 53 7,0x 6,5x 5,8x 0,7x 0,7x 0,7x 12,5x 9,5x 7,3x 1,4x Affecto 78 10,4x 7,6x 6,2x 0,7x 0,7x 0,7x 15,3x 11,1x 8,6x -0,3x Enea 127 9,1x 7,6x 6,9x 2,0x 1,9x 1,8x 13,5x 11,7x 5,7x -1,8x Solteq 28 9,5x 7,7x 7,5x 0,7x 0,7x 0,7x 16,3x 13,6x 12,5x Peer Group Average 443 10,0x 8,8x 8,1x 1,1x 1,0x 1,0x 15,9x 13,7x 11,8x -0,5x Peer Group Median 152 9,7x 8,7x 8,2x 1,0x 0,9x 0,9x 16,6x 14,3x 12,9x -0,5x Innofactor (Evli est.) 55 11,1x 9,0x 7,5x 1,0x 0,9x 0,8x 23,2x 15,4x 13,0x 1,9x Innofactor premium/discount to peer median 14 % 4 % -8 % 4 % -4 % -13 % 40 % 8 % 0 %

Sales CAGR ROE-% ROE-% ROE-% Div. yield Div. yield Div. yield INNOFACTOR PEER GROUP 16-19 17 18 19 17 18 19 Tieto 3 % 24 % 26 % 27 % 4,6 % 4,9 % 5,0 % Bouvet 8 % 48 % 44 % 40 % 4,1 % 4,3 % 4,3 % HiQ 7 % 23 % 24 % 26 % 5,5 % 5,8 % 6,0 % Siili Solutions 14 % 22 % 23 % 24 % 3,7 % 4,5 % 5,8 % Atea ASA 4 % 19 % 22 % 24 % 6,4 % 6,6 % 6,8 % Knowit 7 % 22 % 21 % 20 % 3,0 % 3,0 % 3,0 % Digia 5 % 5 % 15 % 3,2 % 3,5 % 3,9 % Affecto 2 % 8 % 9 % 5,0 % 5,6 % 6,9 % Enea 11 % 17 % 16 % 27 % 3,3 % 3,8 % 8,4 % Solteq 5 % 5 % 10 % 10 % 3,7 % 4,3 % 4,9 % Peer Group Average 7 % 19 % 21 % 20 % 4,3 % 4,6 % 5,5 % Peer Group Median 6 % 20 % 22 % 24 % 3,9 % 4,4 % 5,4 % Innofactor (Evli est.) 10 % 10 % 12 % 12 % 0 % 0 % 0,6 % Source: Bloomberg, Evli Research

Sales growth EBITDA-margin INNOFACTOR PEER GROUP 2014 2015 2016 2017 2018 2019 2014 2015 2016 2017 2018 2019 Tieto -5 % -4 % 2 % 4 % 3 % 3 % 13 % 12 % 14 % 13 % 14 % 14 % Bouvet -5 % 2 % 4 % 13 % 5 % 4 % 8 % 9 % 10 % 10 % 10 % 10 % HiQ 0 % 6 % 9 % 6 % 6 % 6 % 11 % 13 % 13 % 13 % 14 % 14 % Siili Solutions 57 % 42 % 16 % 19 % 12 % 10 % 9 % 10 % 11 % 10 % 11 % 11 % Atea ASA 4 % 6 % 8 % 2 % 4 % 3 % 4 % 3 % 4 % 4 % 4 % 4 % Knowit -2 % 6 % 9 % 5 % 4 % 4 % 7 % 7 % 9 % 10 % 10 % 10 % Digia -2 % -17 % 7 % 9 % 6 % 0 % 6 % 11 % 9 % 10 % 11 % 12 % Affecto -8 % -5 % -3 % 4 % 4 % 0 % 9 % 9 % 7 % 7 % 9 % 11 % Enea 0 % 9 % 3 % 16 % 6 % 8 % 26 % 27 % 28 % 22 % 25 % 26 % Solteq 7 % 32 % 16 % 4 % 8 % 4 % 9 % 9 % 11 % 8 % 9 % 9 % Peer group median -1 % 6 % 7 % 5 % 5 % 4 % 9 % 9 % 10 % 10 % 10 % 11 % Peer group average 5 % 8 % 7 % 8 % 6 % 4 % 10 % 11 % 12 % 11 % 12 % 12 % Innofactor (Evli est.) 35 % 1 % 34 % 18 % 7 % 5 % 9 % 8 % 8 % 9 % 10 % 10 % Source: Factset, Evli Research

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EVLI EQUITY RESEARCH INNOFACTOR Software/Finland, June 2, 2017 Company report

VALUATION RESULTS BASE CASE DETAILS VALUATION ASSUMPTIONS ASSUMPTIONS FOR WACC Current share price 1.67 PV of Free Cash Flow 34 Long-term growth, % 2.5 Risk-free interest rate, % 2.25 DCF share value 1.92 PV of Horizon value 52 WACC, % 8.4 Market risk premium, % 5.8 Share price potential, % 14.8 Unconsolidated equity 0 Spread, % 0.5 Debt risk premium, % 2.8 Maximum value 2.1 Marketable securities 1 Minimum WACC, % 7.9 Equity beta coefficient 1.00 Minimum value 1.7 Debt - dividend -17 Maximum WACC, % 8.9 Target debt ratio, % 20 Horizon value, % 60.5 Value of stock 69 Nr of shares, Mn 36.2 Effective tax rate, % 21

DCF valuation, EURm 2016 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E Horizon Net sales 60 70 75 79 83 86 89 93 95 98 100 103 Sales growth, % 34.1 17.8 6.7 5.7 4.4 4.0 4.0 3.5 3.0 2.5 2.5 2.5 Operating income (EBIT) 2 4 5 6 7 7 8 8 8 8 9 9 EBIT margin, % 3.9 5.5 7.1 7.8 8.4 8.7 8.8 8.8 8.8 8.5 8.5 8.5 + Depreciation+amort. 2 3 2 2 2 2 2 1 1 1 1 - Income taxes 2 0 -1 -1 -1 -1 -1 -1 -2 -1 -2 - Change in NWC -1 -5 -2 -2 -2 0 0 0 0 0 0 NWC / Sales, % -4.6 3.0 5.0 7.5 10.0 10.0 10.0 10.0 10.0 10.0 10.0 + Change in other liabs 1 0 0 0 0 0 0 0 0 0 0 - Capital Expenditure -7 -1 -2 -1 -1 -1 -1 -1 -1 -1 -1 -1 Investments / Sales, % 12.3 2.0 2.2 1.1 1.3 0.9 0.7 0.9 1.1 1.2 1.2 1.2 - Other items -2 0 0 0 0 0 0 0 0 0 0 = Unlevered Free CF (FCF) -3 0 4 4 4 7 7 7 7 6 6 111 = Discounted FCF (DFCF) 0 3 3 3 5 5 4 4 3 3 52

= DFCF min WACC 0 3 4 3 5 5 4 4 3 3 59 = DFCF max WACC 0 3 3 3 5 5 4 4 3 3 45

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EVLI EQUITY RESEARCH INNOFACTOR Software/Finland, June 2, 2017 Company report

INTERIM FIGURES EVLI ESTIMATES, EURm 2016Q1 2016Q2 2016Q3 2016Q4 2016 2017Q1 2017Q2E 2017Q3E 2017Q4E 2017E 2018E 2019E Net sales 15 15 12 18 60 18 19 15 20 70 75 79 EBITDA 1 1 1 2 5 1 2 1 3 7 8 8 EBITDA margin (%) 6.3 7.0 7.3 11.1 8.1 6.6 8.1 8.8 13.4 9.4 10.4 10.4 EBIT 0 0 0 1 2 0 1 1 2 4 5 6 EBIT margin (%) 2.1 2.9 2.2 7.4 3.9 2.8 4.5 4.2 9.9 5.5 7.1 7.8 Net financial items 0 0 0 0 0 0 0 0 0 -1 0 0 Pre-tax profit 0 0 0 1 2 0 1 0 2 3 5 6 Tax 0 0 0 0 0 0 0 0 0 -1 -1 -1 Tax rate (%) 19.9 19.9 20.4 20.0 20.0 19.9 20.0 20.0 20.0 20.0 21.0 21.0 Net profit 0 0 0 1 1 0 1 0 1 3 4 5 EPS 0.00 0.01 0.00 0.03 0.04 0.01 0.02 0.01 0.04 0.07 0.11 0.13 EPS adjusted (diluted no. of shares) 0.00 0.01 0.00 0.03 0.04 0.01 0.02 0.01 0.04 0.07 0.11 0.13 Dividend per share 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.01 SALES, EURm Innofactor 15 15 12 18 60 18 19 15 20 70 75 79 Total 15 15 12 18 60 18 19 15 20 70 75 79 SALES GROWTH, Y/Y % Innofactor 30.5 34.1 26.6 42.9 34.1 20.0 22.5 23.5 8.4 17.8 6.7 5.7 Total 30.5 34.1 26.6 42.9 34.1 20.0 22.5 23.5 8.4 17.8 6.7 5.7 EBIT, EURm Innofactor 0 0 0 1 2 0 1 1 2 4 5 6 Total 0 0 0 1 2 0 1 1 2 4 5 6 EBIT margin, % Innofactor 2.1 2.9 2.2 7.4 3.9 2.8 4.5 4.2 9.9 5.5 7.1 7.8 Total 2.1 2.9 2.2 7.4 3.9 2.8 4.5 4.2 9.9 5.5 7.1 7.8

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EVLI EQUITY RESEARCH INNOFACTOR Software/Finland, June 2, 2017 Company report

INCOME STATEMENT, EURm 2012 2013 2014 2015 2016 2017E 2018E 2019E Sales 19 33 44 44 60 70 75 79 Sales growth (%) 9.4 73.7 34.1 1.4 34.1 17.8 6.7 5.7 Costs -18 -29 -40 -41 -55 -64 -67 -71 Reported EBITDA 1 3 4 4 5 7 8 8 Extraordinary items in EBITDA 0 0 0 0 0 0 0 0 EBITDA margin (%) 6.5 10.0 8.7 8.3 8.1 9.4 10.4 10.4 Depreciation -1 -1 -1 -1 -2 -3 -2 -2 EBITA 1 2 2 3 2 4 5 6 Goodwill amortization / writedown 0 0 0 0 0 0 0 0 Reported EBIT 1 2 2 3 2 4 5 6 EBIT margin (%) 3.3 6.9 5.5 5.7 3.9 5.5 7.1 7.8 Net financials 0 0 0 -1 0 -1 0 0 Pre-tax profit 1 2 2 2 2 3 5 6 Extraordinary items 0 0 0 0 0 0 0 0 Taxes 0 0 0 0 0 -1 -1 -1 Minority shares 0 0 0 0 0 0 0 0 Net profit 0 1 1 1 1 3 4 5 BALANCE SHEET, EURm Assets Fixed assets 2 5 4 4 10 8 8 6 % of sales 11 15 9 8 16 12 10 8 Goodwill 3 19 20 20 28 28 28 28 % of sales 15 59 45 44 46 39 37 35 Inventory 0 0 0 0 0 0 0 0 % of sales 0 0 0 0 0 0 0 0 Receivables 9 14 16 13 19 22 23 24 % of sales 47 43 36 30 33 31 31 30 Liquid funds 1 1 1 1 1 2 2 7 % of sales 3 3 2 2 2 3 3 9 Total assets 22 47 48 44 64 65 66 69 Liabilities Equity 14 16 20 21 23 30 34 41 % of sales 73 50 45 48 38 42 46 52 Deferred taxes 1 1 1 1 2 2 2 2 % of sales 3 3 2 2 4 3 2 2 Interest bearing debt 1 15 14 12 17 14 10 9 % of sales 7 46 32 28 28 20 13 11 Non-interest bearing current liabilities 6 14 13 9 22 20 19 18 % of sales 34 43 31 21 37 28 26 23 Other interest free debt 0 0 0 0 0 0 0 0 % of sales 0 0 0 0 0 0 0 0 Total liabilities 22 47 48 44 64 65 66 69 CASH FLOW, EURm + EBITDA 1 3 4 4 5 7 8 8 - Net financial items 0 0 0 -1 0 -1 0 0 - Taxes 0 0 0 0 0 -1 -1 -1 - Increase in Net Working Capital -1 -1 -1 1 -1 -5 -2 -2 +/- Other 0 -1 0 0 -2 0 0 0 = Cash flow from operations 0 1 2 4 3 1 5 4 - Capex 0 0 -1 0 -1 -1 -2 -1 - Acquisitions -1 -2 0 -2 -6 0 0 0 + Divestments 0 0 0 0 0 0 0 0 = Net cash flow -1 -1 2 2 -4 -1 3 4 +/- Change in interest-bearing debt 1 14 -1 -1 4 -3 -4 -1 +/- New issues/buybacks 0 5 2 1 0 4 1 2 - Paid dividend 0 0 0 0 0 0 0 0 +/- Change in loan receivables 0 0 0 0 1 0 0 0 Change in cash 1 17 2 2 1 1 0 4

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EVLI EQUITY RESEARCH INNOFACTOR Software/Finland, June 2, 2017 Company report

KEY FIGURES 2013 2014 2015 2016 2017E 2018E 2019E M-cap 39 25 33 38 60 60 60 Net debt 14 13 12 16 12 8 1 Enterprise value 53 38 44 54 72 68 62 Sales 33 44 44 60 70 75 79 EBITDA 3 4 4 5 7 8 8 EBIT 2 2 3 2 4 5 6 Pre-tax 2 2 2 2 3 5 6 Earnings 1 1 1 1 3 4 5 Book value 16 20 21 23 30 34 41 Valuation multiples EV/sales 1.6 0.9 1.0 0.9 1.0 0.9 0.8 EV/EBITDA 16.2 9.9 12.0 11.2 11.0 8.7 7.5 EV/EBITA 23.6 15.6 17.4 23.3 18.7 12.8 10.0 EV/EBIT 23.6 15.6 17.4 23.3 18.7 12.8 10.0 EV/operating cash flow 38.8 16.3 11.3 15.8 57.0 12.6 11.9 EV/cash earnings 18.0 11.5 14.0 8.5 12.7 10.1 8.7 P/E 18.8 21.9 26.0 25.8 22.5 15.5 13.0 P/E excl. goodwill 18.8 21.9 26.0 25.8 22.5 15.5 13.0 P/B 2.4 1.3 1.5 1.7 2.0 1.8 1.5 P/sales 1.2 0.6 0.7 0.6 0.9 0.8 0.8 P/CF 28.4 10.8 8.3 11.2 47.5 11.2 11.7 Target EV/EBIT 0.0 0.0 0.0 0.0 20.4 14.0 11.1 Target P/E 0.0 0.0 0.0 0.0 25.0 17.2 14.5 Target P/B 0.0 0.0 0.0 0.0 2.3 1.9 1.6 Per share measures Number of shares 30,909 32,154 33,454 33,454 36,188 36,188 36,188 Number of shares (diluted) 30,909 32,154 33,454 33,454 36,188 36,188 36,188 EPS 0.05 0.04 0.04 0.04 0.07 0.11 0.13 EPS excl. goodwill 0.07 0.04 0.04 0.04 0.07 0.11 0.13 Cash EPS 0.10 0.10 0.10 0.19 0.16 0.19 0.20 Operating cash flow per share 0.04 0.07 0.12 0.10 0.04 0.15 0.14 Capital employed per share 0.99 1.01 0.98 1.14 1.15 1.16 1.18 Book value per share 0.53 0.61 0.64 0.67 0.82 0.95 1.13 Book value excl. goodwill -0.09 0.00 0.05 -0.16 0.05 0.19 0.37 Dividend per share 0.00 0.00 0.00 0.00 0.00 0.00 0.01 Dividend payout ratio, % 0.0 0.0 0.0 0.0 0.0 0.0 7.8 Dividend yield, % 0.0 0.0 0.0 0.0 0.0 0.0 0.6 Efficiency measures ROE 9.3 6.7 6.2 6.8 10.3 12.2 12.3 ROCE 9.7 7.4 7.6 6.4 9.4 12.1 13.1 Financial ratios Capex/sales, % 8.6 1.6 4.9 12.3 2.0 2.2 1.1 Capex/depreciation excl. goodwill,% -1,330.0 31.8 185.9 -31.5 50.8 65.4 43.9 Net debt/EBITDA, book-weighted 4.3 3.4 3.1 3.3 1.8 1.0 0.2 Debt/equity, market-weighted 0.4 0.6 0.4 0.4 0.2 0.2 0.1 Equity ratio, book-weighted 35.2 41.0 48.5 35.4 45.5 52.4 59.5 Gearing 0.86 0.66 0.54 0.70 0.41 0.22 0.04 Number of employees, average 307 421 409 532 621 645 668 Sales per employee, EUR 106,466 104,119 108,685 112,060 113,195 116,134 118,602 EBIT per employee, EUR 7,345 5,717 6,218 4,383 6,235 8,245 9,251

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EVLI EQUITY RESEARCH INNOFACTOR Software/Finland, June 2, 2017 Company report

COMPANY DESCRIPTION: Innofactor provides software products and solutions. It specializes in Microsoft-based cloud solutions and digital transformation. The company offers process innovation, digital business, flexible collaboration, business productivity, and intelligent cloud solutions to commercial, public sector, and membership-based organizations in the Nordic countries.

INVESTMENT CASE:

OWNERSHIP STRUCTURE SHARES EURm % Ensio Sami 7,460,715 12.459 20.6% Tilman Tuomo Tapani 2,747,492 4.588 7.6% Ilmarinen Mutual Pension Insurance Company 1,550,000 2.589 4.3% Laiho Rami Tapani 1,355,019 2.263 3.7% Linturi Kaija ja Risto 1,261,411 2.107 3.5% Arje Matias Juhanpoika 923,278 1.542 2.6% Maki Antti Jussi 897,233 1.498 2.5% Muukkonen Teemu Heikki 522,230 0.872 1.4% Jarvenpaa Janne-Olli 322,804 0.539 0.9% Kukkonen Heikki-Harri 316,021 0.528 0.9% Ten largest 17,356,203 28.985 48% Residual 18,832,022 31.449 52% Total 36,188,225 60.434 100%

EARNINGS CALENDAR August 01, 2017 Q2 report October 31, 2017 Q3 report

OTHER EVENTS

COMPANY MISCELLANEOUS CEO: Sami Ensio Keilaranta 9, FI-02150 CFO: Patrik Pehrsson Tel: +358 (0)10 272 9000 IR:

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EVLI EQUITY RESEARCH INNOFACTOR Software/Finland, June 2, 2017 Company report

DEFINITIONS

P/E EPS Price per share Profit before extraordinary items and taxes Earnings per share − income taxes + minority interest Number of shares

P/Sales DPS Market cap Dividend for the financial period per share Sales

P/BV CEPS Price per share Gross cash flow from operations Shareholders' equity + taxed provisions per share Number of shares

P/CF EV/Share Price per share Enterprise value Operating cash flow per share Number of shares

EV (Enterprise value) Sales/Share Market cap + net debt + minority interest at market value Sales − share of associated companies at market value Number of shares

Net debt EBITDA/Share Interest bearing debt − financial assets Earnings before interest, tax, depreciation and amortisation Number of shares

EV/Sales EBIT/Share Enterprise value Operating profit Sales Number of shares

EV/EBITDA EAFI/Share Enterprise value Pretax profit Earnings before interest, tax, depreciation and amortisation Number of shares

EV/EBIT Capital employed/Share Enterprise value Total assets − non interest bearing debt Operating profit Number of shares

Div yield, % Total assets Dividend per share Balance sheet total

Price per share

Payout ratio, % Interest coverage (x) Total dividends Operating profit Earnings before extraordinary items and taxes − income taxes + minority interest Financial items

Net cash/Share Asset turnover (x) Financial assets − interest bearing debt Turnover Number of shares Balance sheet total (average)

ROA, % Debt/Equity, % Operating profit + financial income + extraordinary items Interest bearing debt Balance sheet total − interest free short term debt Shareholders' equity + minority interest + taxed provisions − long term advances received and accounts payable (average)

ROCE, % Equity ratio, % Profit before extraordinary items + interest expenses + other financial costs Shareholders' equity + minority interest + taxed provisions Balance sheet total − non interest bearing debt (average) Total assets − interest free loans

ROE, % CAGR, % Profit before extraordinary items and taxes − income taxes Cumulative annual growth rate = Average growth per year Shareholders' equity + minority interest + taxed provisions (average)

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EVLI EQUITY RESEARCH INNOFACTOR Software/Finland, June 2, 2017 Company report

Important Disclosures

Evli Research Partners Plc (“ERP”) uses 12-month target prices. Target prices are defined by utilizing analytical techniques based on financial theory including (but not limited to) discounted cash flow analysis and comparative valuation. The selection of valuation methods depends on different circumstances. Target prices may be altered on the basis of new information coming to light in the underlying company or changes in interest rates, changes in foreign exchange rates, other securities prices or market indices or outlook for the aforementioned factors or other factors that may change the conditions of financial markets. Recommendations and changes by analysts are available at https://research.evli.com/JasperAllModels.action?authParam=key;461&authParam=x;G3rNagWrtf7K&authType=3 Detailed information about the valuation or methodology and the underlying assumptions is accessible via ERP: http://research.evli.com Investment recommendations are defined as follows:

Target price compared to share price Recommendation < -10 % SELL -10 – (+10) % HOLD > 10 % BUY ERP’s investment recommendation of the analyzed company is in general updated 2 – 4 per year.

The graph above shows the distribution of ERP’s recommendations of companies under coverage in 22nd of February 2017. If recommendation is not given, it is not mentioned here.

Name(s) of the analyst(s): Salokivi, Forslund

This research report has been prepared by Evli Research Partners Plc (“ERP”). ERP is a subsidiary of Evli Bank Plc. Production of the investment recommendation has been concluded on [02.06.2017, 8:30].

None of the analysts contributing to this report, persons under their guardianship or corporations under their control have a position in the shares of the company or related securities.

The date and time for any price of financial instruments mentioned in the recommendation refer to the previous trading day’s closing price(s) unless otherwise stated in the report.

Each analyst responsible for the content of this report assures that the expressed views accurately reflect the personal views of each analyst on the covered companies and securities. Each analyst assures that (s)he has not been, nor are or will be, receiving direct or indirect compensation related to the specific recommendations or views contained in this report.

Companies in the Evli Group, affiliates or staff of companies in the Evli Group, may perform services for, solicit business from, hold long or short positions in, or otherwise be interested in the investments (including derivatives) of any company mentioned in the publication or report.

Neither ERP nor any company within the Evli Group have managed or co-managed a public offering of the company’s securities during the last 12 months prior to, received compensation for investment banking services from the company during the last 12 months prior to the publication of the research report.

ERP may pursue an assignment from the issuer(s) of the financial instruments mentioned in the recommendation or this report. These assignments may have a limited economic or financial impact on ERP and/or Evli. Under such assignments ERP may perform services including, but not limited to, arranging investor meetings or –events, investor relations communication advisory and production of research material.

ERP has signed an agreement with the issuer of the financial instruments mentioned in the recommendation, which includes production of research reports. This assignment has a limited economic and financial impact on ERP and/or Evli. Under the assignment ERP performs services including, but not limited to, arranging investor meetings or –events, investor relations communication advisory and production of research material.

ERP or another company within the Evli Group does not have an agreement with the company to perform market making services.

For the prevention and avoidance of conflicts of interests with respect to this report, there is an information barrier (Chinese wall) between Investment Research and Corporate Finance units concerning unpublished investment banking services to the company. The remuneration of the analyst(s) is not tied directly or indirectly to investment banking transactions performed by Evli Bank Plc or any company within Evli Group.

This report has been disclosed to the company prior to its dissemination. The company has not made any amendments to its contents. Selected portions of the report were provided to the company for fact checking purposes only.

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EVLI EQUITY RESEARCH INNOFACTOR Software/Finland, June 2, 2017 Company report

This report is provided and intended for informational purposes only and may not be used or considered under any circumstances as an offer to sell or buy any securities or as advice to trade any securities.

This report is based on sources ERP considers to be correct and reliable. The sources include information providers Reuters and Bloomberg, stock-exchange releases from the companies and other company news, Statistics Finland and articles in newspapers and magazines. However, ERP does not guarantee the materialization, correctness, accuracy or completeness of the information, opinions, estimates or forecasts expressed or implied in the report. In addition, circumstantial changes may have an influence on opinions and estimates presented in this report. The opinions and estimates presented are valid at the moment of their publication and they can be changed without a separate announcement. Neither ERP nor any company within the Evli Group are responsible for amending, correcting or updating any information, opinions or estimates contained in this report. Neither ERP nor any company within the Evli Group will compensate any direct or consequential loss caused by or derived from the use of the information represented in this publication.

All information published in this report is for the original recipient’s private and internal use only. ERP reserves all rights to the report. No part of this publication may be reproduced or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in any retrieval system of any nature, without the written permission of ERP.

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Evli Bank Plc is not registered as a broker-dealer with the U. S. Securities and Exchange Commission (“SEC”), and it and its analysts are not subject to SEC rules on securities analysts’ certification as to the currency of their views reflected in the research report. Evli Bank is not a member of the Financial Industry Regulatory Authority (“FINRA”). It and its securities analysts are not subject to FINRA’s rules on Communications with the Public and Research Analysts and Research Reports and the attendant requirements for fairness, balance and disclosure of potential conflicts of interest. This research report is only being offered in U.S. by Auerbach Grayson & Company, LLC (Auerbach Grayson) to Major U.S. Institutional Investors and is not available to, and should not be used by, any U.S. person or entity that is not a Major U.S. Institutional Investor. Auerbach Grayson is a broker-dealer registered with the U.S. Securities and Exchange Commission and is a member of the FINRA. U.S. entities seeking more information about any of the issuers or securities discussed in this report should contact Auerbach Grayson. The securities of non-U.S. issuers may not be registered with or subject to SEC reporting and other requirements.

ERP is not a supervised entity but its parent company Evli Bank Plc is supervised by the Finnish Financial Supervision Authority.

Evli Bank Plc, Aleksanterinkatu 19 A, P.O. Box 1081, FIN-00101 Helsinki, Finland, Tel +358 9 476 690, Fax +358 9 634 382, www.evli.com 25(26)

EVLI EQUITY RESEARCH INNOFACTOR Software/Finland, June 2, 2017 Company report

Contact information SALES AND TRADING HELSINKI

Equity Sales Trading ETFs and Derivatives

Ari Laine +358 9 4766 9115 Lauri Vehkaluoto (Head) +358 9 4766 9130 Tobias Björk (Head) +358 9 4766 9130 Lauri Ahokanto +358 9 4766 9117 Pasi Väisänen +358 9 4766 9120 Joachim Dannberg +358 9 4766 9123 Niclas Henelius +358 9 4766 9116 Antti Kässi +358 9 4766 9120 Kimmo Lilja +358 9 4766 9130

Structured Investments Corporate Bonds sales and trading Derivatives Trading

Heikki Savijoki +358 9 4766 9726 Jukka Hyvönen +46 8 407 8138 Sami Järvinen +358 9 4766 9110 Aki Lakkisto +358 9 4766 9123

Evli Investment Solutions

Johannes Asuja +358 9 4766 9205 Markku Reinikainen +358 9 4766 9669

SALES AND TRADING

Urban Lawesson (Head) +46 8 407 8021 Thomas Kåhrström +46 8 407 8018

EQUITY RESEARCH

Forestry, Pulp&Paper, Chemicals, Utilities, Packaging Retail, Consumer Goods, Telecommunications, Construction, Real Estate Healthcare Markku Järvinen (Head of +358 9 4766 9635 Joonas Häyhä +358 9 4766 9662 Tomi Lindell +358 9 4766 9204 Research, Finland)

Technology, Software Strategist Research Analysts

Jonas Forslund +358 9 4766 9314 Valtteri Ahti +358 9 4766 9773 Olli Pöyhönen +358 9 4766 9643 Jerker Salokivi +358 9 4766 9149

EVLI BANK PLC

Aleksanterinkatu 19 A P.O. Box 1081 FIN-00101 Helsinki, FINLAND Phone +358 9 476 690 Fax +358 9 634 382 Internet www.evli.com E-mail [email protected]

EVLI BANK PLC, STOCKHOLMSFILIAL Kungsgatan 27, P.O. Box 16354 SE-111 56 Stockholm Sverige [email protected] Tel +46 (0)8 407 8000 Fax +46 (0)8 407 8001

Evli Bank Plc, Aleksanterinkatu 19 A, P.O. Box 1081, FIN-00101 Helsinki, Finland, Tel +358 9 476 690, Fax +358 9 634 382, www.evli.com 26(26)