Tecnotree Q3'24 earnings preview: Cash flow key to restoring confidence

Translation: Original published in Finnish on 10/21/2024 at 7:17 am EEST.

Tecnotree will publish its Q3 report on Friday, October 25, at around 9.00 am EEST. We expect the company's revenue to grow at a single-digit rate. We expect a significant increase in operating result, partly as a result of the adjustments the company has made. However, given the poor quality of earnings, the focus is back on free cash flow, which is expected to improve moderately towards the end of the year (H2 guidance: 2-5 MEUR) after the negative cash flow in the beginning of the year. Given the cash flow challenges and corporate governance deficiencies, we believe that a clear and sustainable improvement in cash flow and, of course, greater transparency in investor communications are key to rebuilding investor confidence. Tecnotree will hold its Q3 webcast later, on October 30. (Zoom link in the release).

Moderate growth expected

We expect Tecnotree's Q3 revenue to increase by 4% to 22.2 MEUR. We therefore expect the growth rate to pick up from the Q2 level (Q2'24: -3.5%). However, as always, changes in currency exchange rates create uncertainty in both revenue and earnings forecasts. In general, the slowdown in revenue growth in the current year has been affected by Tecnotree's transition to the ARR model, which initially slows down revenue generation as one-off license revenues decline. To some extent, growth will also be negatively affected by a general cooling of market demand, as operators become more cautious about major technological transformations in the current business environment. However, Tecnotree's order book remains at a good level (Q2'24: 72.6 MEUR). The level is about 6% higher than in the comparison period, yet the order book has contracted slightly over the previous two quarters.

Guidance indicates slightly improving cash flow for the rest of the year

We expect Tecnotree's Q3 EBIT to be 7.8 MEUR, which would be a significant year-on-year increase (Q3'23): 6.2 MEUR). The operational profitability is supported by, among other things, the company’s efficiency measures, for which the company has commented that it expects savings of 4.5 MEUR for the current year (7 MEUR in 2025). However, given the poor quality of the company's earnings, the focus is on cash flow. The company's H2 free cash flow guidance is 2-5 MEUR. Free cash flow can vary significantly from quarter to quarter, but a significant improvement in cash flow is expected for the remainder of the year (H1'24: -3.8 MEUR). However, instead of individual quarters, it is important to monitor cash flow over a longer period. Even if cash flow improves to the guidance level, it is still far from the figures in the company's income statement.

The company has much to prove in terms of cash flow

For this year, Tecnotree has guided for revenue growth of 2-7% this year and EBIT growth of 7-15% compared to 2023. Our forecast is for revenue to grow by just over 2% to 80.3 MEUR. The guidance is in constant currencies, and in constant currencies our forecast would be for slightly stronger growth. For operating income, the guidance refers to the reported EBIT, which we expect to grow by only 1% to 24.1 MEUR, missing the guidance. However, we expect adjusted EBIT to increase by 13% to 27.0 MEUR, in line with guidance, with the difference to reported EBIT explained by one-time write-offs -2.9 MEUR in Q2.

Tecnotree has guided its free cash flow for 2025 to exceed 3 MEUR. The improvement in cash flow is mainly due to lower capital expenditures, but cash flow would still remain lean at the lower end of the guidance range next year. Of course, the guidance also leaves room for a positive cash flow surprise. Cash flows are still far from the figures in the company's income statement, which we believe paints an overly rosy picture of the company's ability to generate cash. Given the ongoing cash flow challenges, we believe that risks related to the quality of receivables and intangible assets, for example, are elevated. As such, we believe the company has a lot to prove and that a clear and sustainable improvement in cash flow is key to restoring investor confidence.