Translation: Original comment published in Finnish on 5/7/2024 at 7:31 am EEST.

The program has resulted in a total of 116 layoffs and the discontinuation of the company's TrustStar technology platform. The program aims to save 4.5 MEUR this year and 7 MEUR next year. The size was slightly above our expectations, but with the company's guidance unchanged, there is no significant upward pressure on our forecasts, which are already at the high end of the earnings guidance range.

In addition to the workforce reduction, the company is focusing its product portfolio

The efficiency improvement program involved a total of 116 staff reductions in Finland, India and the Middle East. The program has also seen a reduction in resources dedicated to non-operator verticals in North America, and as a result Tecnotree has decided to discontinue its TrustStar product offering in the American mortgage market. The TrustStar business came into the company through the CognitiveScale acquisition, and we understand that this was not a particularly large business for the company in terms of revenue. Some of the employees working on TrustStar's AI solutions have now been reassigned to work on the company's BSS solutions. According to the company, the termination of TrustStar will result in savings of approximately 1.5 MEUR in sales, marketing and infrastructure costs. We believe it makes sense for the company to focus on its core businesses. As part of the program, Tecnotree also seeks to source contractors in low-cost areas close to its customers. According to the company, this may increase staff numbers, but will create cost savings of around EUR 200,000.

Size of the program was larger than expected, but the guidance remains the same

In total, the company expects the program to deliver operating cost savings of around 4.5 MEUR in 2024. The full impact of the savings will not be felt this year, and in 2025 the company expects savings of around 7 MEUR. Overall, the size of the efficiency program was slightly above our expectations. However, the company's guidance for the current year remains unchanged, with revenue growth of 2-7% and EBIT growth of 7-15% expected for the year. Our current forecasts expect revenue growth of around 6% and EBIT growth of around 13%, already close to the upper end of the guidance range. With guidance unchanged, there is no significant revision pressure on our earnings forecasts as a result of the release. The company’s efficiency program was already known in our previous update, although its final size was slightly larger than we expected.

Cash flow challenges make savings necessary

Overall, Tecnotree’s profitability, as measured by the EBIT margin, is already at a very good level (2023: 30.4%) and profitability has scaled well, mainly in line with growth, when looking at the income statement. Nevertheless, cash flow generation has been challenging for the company due to working capital commitments, FX losses and significant product development investments that the company has not been able to fund from its own cash flow (directed share issue in 2021 and convertible bond in 2023). In our view, the need for an efficiency program of the magnitude announced alludes to the challenges in cash flow generation and the company's income statement does not reflect a fully realistic picture of the company's operating profitability. Thus, maintaining cost efficiency is critical for the company.