Tecnotree Q4'24: Cash flow is improving, but so far slowly

Translation: Original published in Finnish on 2/27/2025 at 8:17 am EET.

Tecnotree's Q4 key figures deviated significantly from our forecasts, both positively and negatively, but cash flow was, as expected, still scarce. The cash flow guidance for the current year has been moderately increased, but we do not believe this changes the overall picture of the cash flow profile. We raise our target price for Tecnotree to EUR 3.5 (was EUR 3.0) and reiterate our Reduce recommendation. 

Q4 key figures were significantly different from our forecasts

Tecnotree's Q4 revenue decreased by 21% to 17.6 MEUR, significantly below our forecast of 23.4 MEUR. This was partly explained to exchange rates, but also on a comparable basis growth (-16.5%) was well below our expectations. This was partly due to factors related to the timing of sales in the second half of the year, but the general shift to the ARR model also slowed the accumulation of revenue last year. However, the order book remains at a good level of 79.6 MEUR (2023: 80.2 MEUR), including more recurring revenue. Tecnotree's Q4 EBIT was 10.9 MEUR, well above our forecast (6.9 MEUR) and corresponding to an EBIT margin of as much as 62%. However, there were some anomalies in the cost structure, such as the release of provisions, which resulted in a surplus of 1.3 MEUR in materials and services. In general, the company has also significantly reduced its fixed costs, which has been reflected in a reduction in headcount. Despite the strong operating profit, the net result remained at only 0.5 MEUR. The bottom line was burdened by a 4.4 MEUR write-off of receivables related to the sale of a subsidiary in the Middle East. Free cash flow was slightly positive in Q4 (0.4 MEUR), as required by the company's guidance. Cash and cash equivalents decreased slightly after currency revaluations. In other words, the company still did not actually make much money.

Slight increase in cash flow guidance

Tecnotree’s guidance is for low to mid-single digit revenue growth in 2025. The company expects the EBIT margin to improve by at least 2 percentage points. The mixed Q4 performance led us to cut our revenue forecasts but raise our profitability and earnings forecasts. The company raised its free cash flow guidance to over 4 MEUR (previously over 3 MEUR). While the direction here was positive, considering the outcome landed at the lower end of the guidance for the rest of the year, this was not particularly surprising. In any case, free cash flow this year is still well below the company's earnings level, and we do not expect a large release of working capital. At the end of 2024, receivables represented 107% and net working capital 86% of the company's revenue. The levels are exceptionally high.

We continue to monitor cash flow development from the sidelines

In our view, determining the fair value of Tecnotree is very challenging. We do not believe that cheap-looking earnings-based multiples can be relied upon, and visibility on the company's sustainable cash flow generation capacity is weak. At the lower end of the cash flow guidance, the cash flow yield would be in single digits, which we find unattractive given Tecnotree's risk level. Our DCF model, which assumes a significant improvement in cash flow over the next few years, suggests a value of EUR 4.7 per share. However, this does not take into account the dilution from the company's convertible bonds and employee stock option plan over the next few years (combined effect of around 40-50% at current share price), which makes the upside unattractive. We believe that the company's business risks are high, and given the still relatively slow improving cash flow outlook, we believe that the risk/reward for investors remains weak. New successes in the US market could act as a positive driver for the share in the future, but we believe that with the current valuation, the improving cash flow outlook associated with these is already somewhat priced into the share. In the case of Tecnotree, we continue to recommend focusing on the recommendation rather than the target price.