A software company of the Qt Group Friday’s profit warning does not seem overly worrying OP: n senior analyst Kimmo Stenvall. In fact, he estimates that Qt is one of the best growth companies on the Helsinki Stock Exchange.
In Friday’s earnings warning, Qt lowered its revenue growth expectations for 2024. The company expects the previous year’s operating profit margin to be close to the upper edge of the previously indicated range, in which case it would reach close to 35 percent.
When viewed in comparable currencies, the company’s turnover grew by 15–16 percent in 2024, the company estimates. Previously, the recommended growth range was 20–25 percent.
The fourth quarter is critical
Stenvall explains that it is typical in Qt’s industry for deals to be signed in the fourth quarter, often in December.
“Big deals are almost always made in the fourth quarter. When old contracts expire, they are renewed and prices may be increased. Of course, new customers come throughout the year, but often the names are in the paper in the fourth quarter.”
Therefore, the final implementation of the guidelines will not be resolved in practice until the fourth quarter.
“The turnover growth at the beginning of the year was below the recommended level, so we knew that the fourth quarter would have to be really good in order to fulfill the guidance for the whole year,” says Stenvall.
On Friday, the company said that some of the contracts will be carried over to this year, and therefore they could not be recognized for 2024.
From a practical point of view, does it matter whether names are put on the papers in December or January?
It’s about goals
Stenvall reminds that Qt’s long-term annual growth goal is 20–30 percent.
“During the last two years, Qt has been able to grow by more than 20 percent in just a few quarters, which is also an excellent performance,” he continues.
However, at least some of the investors have positioned themselves to expect annual growth of 20 percent and a very supportive margin.
However, analysts do not swallow the 20 percent growth promise without biting. Analytics company Modular Finance a consensus forecast of seven analysts expects Qt’s revenue to grow by 17.8 percent in 2024, 18.9 percent in 2025, and 18.3 percent in 2026.
“Analysts see that the company’s target level is really high and it is difficult to reach it. Already 15–17 percent growth is really hard in this state of the world,” says Stenvall.
Even if Qt’s net sales in 2024 fall short of expectations, its result will still be better than consensus forecasts, says Stenvall.
There’s plenty of headroom
OP’s target price for Qt’s share is EUR 87. Compared to Friday’s closing price, the upside would be just under 24 percent. The target price is based on an EV/EBITA factor of 20 and the 2026 result.
“After all, it’s a higher multiplier, but you have to pay high multipliers for a company that is growing and profitable like this. If the economic growth continues, the value of the share should rise considerably”, Stenvall estimates.
The stock market’s reaction to the profit warning also speaks of faith in the upside potential.
After the earnings warning, Qt’s share price plunged almost seven percent to 64.15 euros, but recovered to 69.1 euros before the stock market closed. During the trading day, the value of the share decreased by approximately one percent.
The general situation of the economy is directly visible
The majority of Qt’s revenue is generated from developer licenses, which are obtained when a customer buys Qt’s software for their own development work.
A smaller part of the turnover comes from distribution licenses, which Qt’s customers pay for each manufactured product. The sales figures of Qt’s customers therefore directly affect the company’s distribution license income.
The main reason for Friday’s earnings warning was the transfer of development license deals to this year.
“However, it should be noted that during the last year, the distribution license income has grown clearly less than the company expected. The sales volume of distribution licenses should increase significantly every year, because new products come out every year,” Stenvall points out.