Translation: Original comment published in Finnish on 10/23/2023 at 6:56 am EEST.

Tecnotree will publish its Q3 report on Friday at around 9.00 am EEST. We expect the company to deliver single-digit net sales growth and a clear year-on-year improvement in earnings. Of particular interest in the report is the development of the order intake, which has shown signs of softening in the early part of the year. The report also serves again as a benchmark for the development of the company's growth investments, for which the company raised EUR 43 million in convertible bonds in the summer.

Single-digit growth

We expect Tecnotree's Q3 net sales to increase by 6% to EUR 21.1 million. The growth is supported in particular by the company's still strong order book (Q2'23: 68.4 MEUR) and the new customer wins through the CognitiveScale acquisition, which we believe the company has managed to close quite well. However, going forward, the demand outlook is subject to heightened uncertainty as the economic outlook weakens. This has already been reflected in the order intake early in the year (H1'23: EUR 32.1, -30%). However, the shift to the ARR model may partly explain the slowdown in the order flow, as there are fewer larger individual orders to be filled at once. Growth is partly constrained by the strengthening of the euro against the dollar.

Expectations of healthy earnings growth

We expect Tecnotree's Q3 EBIT to land at EUR 5.9 million (Q2'22: 5.0 MEUR) which would correspond to an EBIT margin of 28% (Q3’22: 25.4%). Earnings growth is driven by an increase in net sales and a moderate improvement in relative profitability. The company has taken savings measures this year, which should support the development of profitability. The result for the comparison period was partly exceptional as it was burdened by provisions for receivables and partly supported by write-ups of the value of the company's own products, which was reflected in positive depreciation.

Like in the comparison period, we expect EPS to round up to EUR 0.01. We note that there are always challenges in forecasting FX rates and withholding tax positions, which creates uncertainty in the forecasting of the bottom lines of the income statement. In general, the earnings 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.

Particular attention on order intake development

Tecnotree's current guidance estimates that the company's net sales will grow by 7-15% and EBIT by 10-20% in the current year. Our current forecasts expect net sales to grow by 8% to EUR 77 million and to land at the lower end of the guidance range. We expect EBIT to grow by 17% to EUR 21.5 million (27.8% of net sales). The development of the demand outlook and order intake are of particular interest in the report. The order flow has shown signs of softening in the early part of the year and its evolution is essential as growth for the coming years is already being built up. The company commented in the Q2 results that some orders were deferred to Q3 for timing reasons. The company has announced new orders quite frequently during the fall, but we estimate that these have been relatively small in size. We understand that an increasing number of the company's customers have started to favor ARR deliveries, which may contribute to limiting the wins of larger individual license orders. In the longer term, however, this brings more predictability to net sales by smoothing out the quarterly differences in net sales, earnings, and cash flow.