Profit warning from Revenio: Growth stalls, earnings estimates under pressure

Translation: Original comment published in Finnish on 8/1/2023 at 10:25 pm.

On Tuesday, Revenio Group lowered its 2023 financial guidance for net sales development. The company maintained its profitability guidance unchanged, but stalling growth is still strongly reflected in earnings estimates through high gross margins. We have not yet made any estimate revisions, but we expect our earnings estimates to fall sharply with our next update. This naturally puts pressure on our target price (EUR 38.0), which we will reassess together with our Reduce recommendation. Consensus forecasts are also under strong downward pressure after the profit warning, so we expect a strong negative price reaction.

Net sales growth has slowed down heavily

In its profit warning, Revenio estimates that the group's exchange rate-adjusted net sales growth to be 1-5% year-on-year in 2023. Previously, the company estimated strong growth in currency-adjusted net sales, so this is a significant change. It is also noteworthy that Revenio is guiding for a currency-adjusted change in net sales, and at least the US dollar has turned against the company in 2023. The dollar has weakened against the euro over the year, with EUR/USD now around 1.10 (last year's average was 1.054). About half of Revenio's net sales comes from the United States and the share of earnings is even higher, through which the strong dollar has benefited the company. If the currency headwinds continue, Revenio's reported net sales could well fall from last year under the new guidance. We previously expected Revenio's net sales to grow by around 14% in 2023, which is close to the consensus forecast. As a result, our growth estimates are under significant pressure. In Q1, Revenio's net sales growth was still at a good level of almost 15%, so the deceleration for the rest of the year is expected to be significant.

Profitability to remain "at a good level", but earnings still under pressure

Revenio reiterated its guidance on profitability, estimating profitability at a good level excluding non-recurring items. We are not sure what "at a good level" means for Revenio, but we estimate it means an EBIT margin of around 25-30%. A significant reduction in the net sales estimate combined with a gross margin of around 70% means a sharp drop in earnings estimates, unless Revenio has taken significant savings measures on fixed costs amid cost inflation. We think this is unlikely, and we also see clear downward pressure on EBIT margin forecasts. We previously expected Revenio's EBIT margin to be 29.0% in 2023, and the consensus forecast was even higher (adj. 29.6%). We therefore see downward pressure on the profitability estimate, which is reflected in the earnings estimates with significant leverage. At the moment, it looks like Revenio's wild earnings improvement streak is coming to an end in 2023, with EPS falling from 2022.

Background: market slowdown

In the profit warning, Revenio said that the operating environment is challenging and expects the challenges to continue for the rest of the year. The company expects inflation and interest rates, among other things, to be reflected in customers' purchasing behavior in the main markets and said it has already seen signs of cautious investment by opticians. The company expects this to affect the demand for its products and thus the development of net sales during the rest of 2023. The company also anticipates a general market slowdown and does not currently see clear signs of improving market conditions in the second half of the year.

Revenio already mentioned in its Q1 report a slight caution and slowness in decision-making among its customers, so as such the market slowdown is not surprising. However, we assume that the situation has now changed significantly, because in Q1 we still think the overall picture was quite good. In view of this, the comments seem a bit unclear, but we will have to wait until the Q2 earnings call (August 10) for more details.

Exceptional negative surprise

Revenio has had an excellent earnings growth story and is known as a very high quality company and a defensive company, although this may have been undermined by the increased share of imaging devices (more investment due to higher price range). The company has weathered all the storms of the past few years without any major setbacks and has maintained a strong earnings growth trajectory. Instead of profit warnings, the company has traditionally delivered positive surprises, which has also kept market expectations high. Revenio's investment story as a defensive earnings growth story is now taking a significant hit, which may also be reflected in the valuation level acceptable for the company. However, we believe that we cannot yet draw too far-reaching conclusions, as this could end up being a nasty bump in the longer-term growth story. We will update our estimates and our view on the stock in the near future.