Translation: Original published in Finnish on 4/30/2025 at 7:30 am EEST.

Tecnotree’s Q1 order intake and profitability were weaker than expected, but the cash flow trend was moderately positive, as anticipated. The multi-part guidance was reiterated, but to achieve it, profitability needs to improve and cash flow needs to remain positive for the rest of the year. With the relatively neutral report, we reiterate our target price of EUR 3.5 and our Reduce recommendation. 

Cash flow moderately positive as expected

Tecnotree's Q1 revenue increased by just under 4% to 16.9 MEUR, slightly exceeding our estimate of 16.6 MEUR. The growth came especially from license revenue, which was zero in the comparison period. Geographically, the growth came from the MEA & APAC regions, with negative growth in Europe and the Americas. This was a slight disappointment given the company's growth targets in these markets, but on the positive side Tecnotree also announced a new deal in Europe on the day of the results. In Q1, Tecnotree's EBIT was 4.5 MEUR (Q1’24: 4.4 MEUR), below our forecast of
5.9 MEUR. Relative profitability was flat year-on-year, meaning that the efficiency gains from the company's savings program were not reflected in profitability in Q1 as expected. We estimate that this is due to a reduction in the capitalization of product development costs (negative profitability impact on the income statement), in addition to some one-off costs apparently resulting from the savings program in Q1, which have not been adjusted.

Tecnotree's order book amounted to 70.3 MEUR, down from the comparison period (Q1’24: 74.8 MEUR) and the turn of the year (2024: 79.6 MEUR). Although the low order flow at the beginning of the year is a cause for concern, there have been clear fluctuations in order flow from one quarter to the next in the past. Part of the decrease in the order book can be explained by the transition to the ARR model, where recurring revenue is only recognized in the order book for one year.

Tecnotree generated 1.0 MEUR of free cash flow in Q1 (0.5 MEUR including currency translation effects). The positive and clearly improving cash flow (Q1’24: -4.3 MEUR) was naturally positive but also expected. In addition to declining investments, the company was able to reduce especially trade receivables, while other receivables increased significantly.

Multi-step guidance repeated

Tecnotree reiterated its guidance of low to mid-single-digit revenue growth, an EBIT margin improvement of at least 2 pp and free cash flow above 4 MEUR. In terms of growth, the company progressed in line with guidance in Q1. Tecnotree must improve its profitability towards the end of the year, for which the cost structure reduction of the savings program should provide the basis. In terms of cash flow, the company progressed exactly in line with guidance in Q1  and we consider the guidance to be realistic. There may be significant quarter-to-quarter volatility in cash flow, although the company's ARR transition should even out cash flow going forward.

We continue to monitor the evolution of the cash flow profile from the sidelines

We find it challenging to determine Tecnotree's fair value, as we cannot rely on seemingly cheap earnings-based multiples and visibility into 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 4.8 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 the current share price), which makes the upside unattractive. We see the continued improvement in cash flow over the coming years as the main driver for the stock, but we believe that the improving cash flow outlook is to some extent already priced into the stock at the current valuation. As a result, we find the risk/reward unattractive.