UPDATE 1-Tieto profit falls short of expectations, shares drop

Fri Jul 18, 2014 4:16am EDT

(Adds shares, analyst)

HELSINKI, July 18 (Reuters) - Finnish IT services provider Tieto on Friday reported an unexpected fall in second quarter earnings due to weakness at its product development service business, sending the company's shares down as much as six percent.

Tieto's second-quarter operating profit, excluding one-off items, was 30 million euros ($40.6 million), less than analysts' average expectation of 34 million and short of 30.6 million euros posted a year earlier.

"We continue to take actions in our product development services business where volumes are negatively impacted by customer insourcing and the market environment is changing," Tieto said referring to customers doing IT in-house rather than buying in services.

Tieto's shares fell as much as 6.3 percent to 19.85 euros by 0715 GMT, compared with a flat Helsinki stock exchange general index.

"There is no single explanation for the shortfall in results, but all business sectors disappointed slightly," market analysis firm Inderes analyst Mikael Rautanen said in a note to investors. Inderes has an "accumulate" rating on the stock.

The company, market leader in IT services in Finland, has been cutting costs over the past year to cope with weak demand, particularly from the telecommunications sector. Europe's weak economy and competition in telecoms has discouraged companies from investing in large IT projects.

Tieto's second-quarter sales fell to 386 million euros from 417 million in the same period a year earlier, and were just below the Reuters poll forecast average of 389 million euros. Group sales last year totalled 1.6 billion euros.

Tieto kept its guidance for the full year unchanged, saying it still expected full-year adjusted operating profit to increase from the previous year's level. Core profit (EBIT) was 141 million euros in 2013.

But the second-quarter profit fall has created some doubts about this. "We still expect it to reach the guidance, but there is a very limited margin for error," Inderes's Rautanen said. ($1 = 0.7394 Euros) (Reporting By Jussi Rosendahl; Editing by Sakari Suoninen and Jane Merriman)