Tecnotree Q4 morning result: Operationally strong result, but exchange rates caused significant damage

Translation: Original comment published in Finnish on 2/22/2024 at 10:03 am EET.

Tecnotree's revenue growth in Q4 was in line with our forecast, but EBIT clearly exceeded our forecast and the company's own guidance range. However, exchange rates resulted in significant losses, leaving the net result well below the comparison period. As expected, cash flow improved slightly towards the end of the year, but no outlook was given for the current year. Otherwise, the company's guidance was slightly weaker than expected for growth, but stronger for EBIT. The report raised questions about comparable turnover, exchange rates and cash flow from investments, among other things, which we will try to clarify during the day. The company’s Q4 webcast can be viewed here.

Growth in the ballpark we expected

Tecnotree's Q4 revenue increased by 10.4% to 22.2 MEUR, in line with our forecast (22.5 MEUR). Growth was driven in particular by deliveries, where revenue increased by 106% year-on-year. By contrast, other revenue items (licenses, maintenance and management services and third-party licenses) showed a decrease from the comparison period. Tecnotree's revenue items are quite volatile between quarters so one should not draw far-fetching conclusions based on quarterly figures. According to the company, the revenue from AI solutions was 6.2 MEUR in 2023, which exceeded the company's original estimate of 5 MEUR. In comparable currencies, the company's reported revenue was 107.2 MEUR, which is a very large difference to the reported revenue and requires further investigation. At the end of Q4, Tecnotree's order book grew to an all-time high of 80.2 MEUR (Q4'22: 68.9 MEUR). According to our calculations, new orders during the quarter amounted to just under 25 MEUR. Thus, the demand environment appears to have remained favorable towards the end of the year.

Strong result at EBIT level, but currencies resulted in significant losses

Tecnotree's Q4 EBIT increased to EUR 7.9 million (Q4'22: 6.1 MEUR), well above our estimate EUR of 5.5 million. For the full year, the company's EBIT increased by 30.2% to 23.8 MEUR (2022: 18.3 MEUR), which clearly exceeded the company's guidance of 15-20% EBIT growth. Foreign exchange losses in Q4 were very high (6.0 MEUR) due to the devaluation of the Nigerian naira and hyperinflation in the Argentinean market. As a result, the net result in Q4 was well below the comparison period (Q4'23: 2.4 MEUR vs. Q4’22: 3.2 MEUR).

As expected, Tecnotree's operating cash flow improved from the weak Q3 levels as a result of the successful collection of receivables and amounted to 4.7 MEUR in Q4. The company's full-year cash flow was 62.2 MEUR (2022: 58.8 MEUR), up 6% year-on-year and below the company's guidance of 12-14%. However, in comparable currencies, the cash flow amounted to 84.1 MEUR. The company had recorded its convertible bond assets as a positive item in cash flow from investing activities, but after adjusting for this, the cash flow after investing activities was -0.6 MEUR. Investments included an advance of -2 MEUR for acquisitions, which may foreshadow news from the company on the acquisition front in the near future.

Guidance indicates continued earnings growth

Tecnotree guided for a 2-7% increase in revenue and a 7-15% increase in EBIT for the current year on the back of continued savings measures. Our forecast before the Q4 report expected revenue to grow by 7% to 84.3 MEUR and EBIT to be 22.4 MEUR, indicating a slight decline from the 2023 level. Thus, there is slight downward pressure on our growth forecasts and upward pressure on our earnings forecasts. The company did not provide cash flow guidance, which was disappointing for us. In its outlook, the company said it expects exchange rates to remain at around their current level, which may be a bold assumption given the continued strong devaluation of the Nigerian naira in the early part of the year. We therefore believe that the FX challenges will continue this year and will also contribute to lower visibility in terms of cash flow repatriation.