Digital Workforce Q4'24: We expect earnings turnaround to continue

Translation: Original published in Finnish on 2/20/2025 at 8:44 am EET.

We reiterate our target price of EUR 4.7 and our Accumulate recommendation. Digital Workforce's financial statements were well in line with our expectations in terms of revenue, earnings and guidance. The company also commented that the sales pipeline remains good and its quality has improved. We leave our forecasts largely unchanged and expect the company to grow well ahead of the IT services market in the coming years and to scale this growth to profitability. The stock's valuation picture (2025e EV/EBIT 16x, P/E 18x, sum of parts EUR 5.2) supports our positive view on the stock. As the earnings turnaround continues, investors can start to rely more strongly on the company's very attractive longer-term valuation picture. 

Operationally, Q4 was in line with our expectations and dividend proposal exceeded our projections

Digital Workforce’s revenue increased by 10% to 7.0 MEUR and was slightly below our expectations. By business line, revenue of the strategically important Continuous Services increased by 19% to 4.6 MEUR, while Professional Services revenue decreased by 2% during Q4. The EBITDA margin was 4%, in line with our forecast of 3-4% in the first half of the year and 4% in Q4. There were no surprises in the non-operating expense lines. Thus, EPS were EUR 0.01 for Q4 and EUR 0.05 for the full year 2024. The board of directors proposed a dividend of EUR 0.03 per share and an additional dividend of EUR 0.06 per share, which together exceeded our expectations of EUR 0.03. The company updated its dividend policy a couple of weeks ago, after which we expected the company to distribute a small dividend. In the big picture, however, the dividend is a surprise, as the company also wants to grow through acquisitions. On the other hand, the absolute amount of the dividend is only about 1 MEUR of the 13 MEUR liquid assets at the end of Q4. 

Strategy and financial targets were refined in December

In December, Digital Workforce made minor refinements to its strategy, and our full comments on this can be found here. In terms of financial targets, the growth target was further refined, and the company continues to aim for a revenue of 50 MEUR. Of this, 40 MEUR is to be achieved organically and 10 MEUR through acquisitions by 2026 In terms of profitability, the targets were increased, and the target is now an adjusted EBITDA of over 15% by the end of 2026 (previously over 10%). Overall, we believe the targets are ambitious but achievable with continuous good performance. 

Digital Workforce's guidance is for improved revenue and adjusted EBITDA in 2025, as expected

Digital Workforce expects higher revenue and improved adjusted EBITDA year-on-year in 2025. In our view, the guidance is easily achievable. The company commented that the sales pipeline remains good and its quality has improved. We forecast the company's revenue to grow by 14% and adjusted EBITDA to increase to 2.3 MEUR year-on-year, or to 7% of revenue in 2025 (2024: 1.0 MEUR). In the following years, we expect continued strong growth of ~14% per year, with EBITDA-% scaling up with growth to 12% in 2026. The company has losses of 13 MEUR from previous financial years, so there will probably be no tax payments for several years.

Valuation picture is attractive and as turnaround continues, confidence in longer term will improve

In terms of investment profile, Digital Workforce is still a turnaround company whose turnaround in profitable growth progressed well last year, which has reduced the risk level of the stock. Based on our forecasts and the valuation multiples we accept for the company (2025e EV/EBIT 16x, P/E 18x), the sum of the parts (EUR 5.2) as well as the DCF calculation (EUR 6.1), we estimate that the fair value range of Digital Workforce’s share is EUR 4.2-6.1 per share. If further evidence of progress on the earnings turnaround emerges this year, we can start to have more confidence in next year's forecasts and the very attractive valuation multiples (2026e EV/EBIT 8x and P/E 11x) as well as the DCF calculation.