Tecnotree Q2 on Friday: Sounding out investment intentions

Translation: Original comment published in Finnish on 8/1/2023 at 10:29 pm.

Tecnotree will publish its Q2 report on Friday at around 9.00 am. We expect the company's net sales to have continued double-digit growth and earnings to have been at about the same level as in the comparison period. We are interested in comments on the development of the company's demand environment and AI investments. The company will present an overview of its market, growth strategy and business in a webcast at 11.00 am on Friday. You can follow the broadcast here and we hope that the overview will provide us with any further hints on the allocation of the company's capital raised through convertible bonds.

We expect continued double-digit growth

We expect Tecnotree's Q2 net sales to increase by 12% to EUR 20.5 million. Growth is particularly supported by the company's strong order book (Q1’23: 67.8 MEUR). Going forward, however, we expect the demand outlook to be uncertain as the economic outlook weakens. To some extent, we estimate that this was already reflected in the order flow in Q1 (14.4 MEUR, -39%), although one cannot draw too many conclusions from a single quarter. We expect both maintenance and administration services and revenues from the sale and delivery of licenses to increase year-on-year. Tecnotree's revenue items fluctuate quite strongly between quarters, which means that there is always uncertainty in forecasting the relationships between the items. We estimate that the growth is also supported by the new clients that have come through the CognitiveScale arrangement, which we believe the company has been quite successful in winning.

Many variables in earnings estimates

We expect Tecnotree's Q2 EBIT to land at EUR 4.8 million (Q2'22: 5.1 MEUR). This would correspond to an EBIT margin of 23.5% (Q2'22: 27.9%). We therefore estimate that relative profitability has weakened somewhat year-on-year. This is due in particular to the strong year-on-year increase in the number of staff, of which we estimate that a significant part is explained by the recruitments made as a result of CognitiveScale. We do not expect the savings measures implemented by the company to have a significant impact on profitability yet during Q2.

We expect EPS to land at EUR 0.01 (Q2'22: EUR 0.01). We note that there are always challenges in forecasting exchange rates and withholding tax rates, which introduce uncertainty to earnings estimates. During Q2, the Nigerian naira lost almost half of its value against the euro as the Central Bank of Nigeria allowed the currency to float. In the short term, we estimate that this may have an impact on, e.g., the company's order book, receivables, and financial expenses. Estimating the magnitude of the impact on the company's income statement is challenging, and our estimate does not take into account the potential impact of devaluation. In general, the estimates also involve uncertainty as to how much of the product development expenditure will be capitalized on the company's balance sheet. In addition to the result, we will again monitor the development of cash flow. The company has estimated that debt collection will increase by 12-18% this year. However, we estimate that this means that net sales growth will still tie up working capital on the balance sheet this year.

We expect the company to maintain the guidance

We expect Tecnotree to reiterate its guidance of 7-15% net sales growth and 10-20% EBIT growth. Our forecasts expect net sales to grow by 14% this year, at the upper end of the guidance range. Our EBIT estimate (22.0 MEUR, 26.9% of net sales) is also at the upper end of the guidance range. We expect profitability to improve towards the end of the year, driven by a higher net sales load and the company's cost savings program (the company is targeting 5-7% savings on total costs). In the report, we are not only interested in the progress of the savings program (mainly implemented in Q2), but also in comments on the company's demand environment and the development of AI investments. We also look forward to following the company's webcast, where the company has, among other things, announced that it will open up its growth strategy to investors in more detail. Here we hope to receive any further indications on the use of the EUR 43 million raised through the company's convertible bonds.