Tecnotree Q2'24 preview: Slight cash flow improvement expected

Translation: Original comment published in Finnish on 8/1/2024 at 7:05 am EEST.

Tecnotree will publish its Q2 report on Friday at around 9.00 am EEST. We expect the company's revenue and result to continue their upward trend, which is also indicated by the company's guidance for the full year. In terms of cash flow, we expect a significant improvement after a very weak start to the year with improved cash collection. The main area of interest in the report will again be the future outlook for the development of the cash flow profile. We also expect an update on the situation regarding the potential company acquisition and the uncollected convertible debentures. 

Expectations for single-digit growth

We expect Tecnotree's Q2 revenue to increase by just over 5% to 20.3 MEUR. We therefore expect the growth rate to be in line with the pace of the first half of the year (Q1’24: +4.7%). The growth rate will be partly slowed down by the transition of Tecnotree's business to the ARR model, with initially slower revenue generation as one-off license sales decline. To some extent, growth will also be negatively affected by a general cooling of market demand, as operators become more cautious about major technology transformations in the current business environment. On the other hand, the revenue development is supported by the company's strong order book (Q1'24: 74.8 MEUR).

Recovery of cash flow expected in the first half of the year

We expect Tecnotree’s EBIT to have continued its upward trend and to have reached 7.0 MEUR in Q2 (Q2'23: 6.2 MEUR) which would mean an EBIT margin of 34.4% (Q2’23: 32.0%). The company's operational profitability is supported by, among other things, its efficiency measures, although their most visible effects will only be seen in the coming quarters and in 2025. The growth in revenue also supports profitability through high gross margins. Given the company's weak cash conversion, we are also closely monitoring the conversion of earnings into cash flow. The company's internal focus this year is strongly on improving cash flow, but the company has not provided cash flow guidance this year. In Q1, cash flow was very weak, partly due to seasonal factors, and we expect a significant rebound in Q2 with the improved collection of receivables.

Cash flow remains a focus

For the current year, Tecnotree expects its revenue to grow by 2-7% and its EBIT by 7-15%. We expect the company's revenue to grow by 5% to 82.3 MEUR and EBIT to increase by 14% to 27.2 MEUR, at the upper end of the guidance range. Due to Tecnotree's weak cash conversion, the development of cash flow and the company's future prospects in this respect are even more interesting than monitoring the company's performance. Tecnotree is actively seeking to change its business model to an annual recurring revenue (ARR) model, which should balance revenue and cash flow between quarters. However, we do not believe that this change will significantly address the challenges posed by the geographic location of the company's customers. The company also aims to grow in developed countries and thus offset the risks of emerging markets.

Another issue on which we look forward to an update in the report is the company's potential acquisition. The company has made an advance payment for the acquisition and has stated that it expects the transaction to close in Q2, but no announcement has been made. In addition, we look forward to hearing an update on the status of the uncollected convertible debentures of 20 MEUR. Royal Front Investment was supposed to purchase the bonds from Fitzroy Investments by the end of Q2'24 at the latest, but the company has not made an announcement on this either. Comments on the company's ongoing collaboration project with HCLTech are also of interest.