• Organic Growth: -33% in Q4, attributed to weak market and customer destocking.
• Order Intake: SEK893 million, 110% growth, with 2% organic growth.
• Sales: SEK807 million, 6% growth, with -33% organic growth.
• Gross Margin: 62.6%, a slight decline from 65.3% due to acquisitions.
• EBIT Margin: 20% for Q4, despite a significant drop in organic sales.
• Adjusted EPS: SEK2.6 for Q4.
• Cash Flow: SEK177 million for Q4, a 49% increase from the previous year.
• Net Debt: SEK3.3 billion, with a focus on deleveraging in 2025.
• Restructuring Savings: SEK44 million in yearly run rate savings from reducing 32 positions.
• Backlog: SEK703 million, representing about 20% of rolling 12-month sales.

• Warning! GuruFocus has detected 6 Warning Sign with FRA:4H3A.

Release Date: January 28, 2025

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• HMS Networks AB (FRA:4H3A) reported a surprisingly strong order intake, particularly from Red Lion, which contributed to a 110% growth in order intake.
• The company successfully completed two significant acquisitions in 2024, Red Lion and PEAK System, which are expected to enhance growth and profitability.
• Despite a challenging market, HMS Networks AB maintained a strong gross margin, with only a slight organic decline of 0.5% despite a 33% drop in organic sales.
• The restructuring program resulted in significant cost savings, reducing 76 positions and saving SEK85 million annually, which helps maintain profitability.
• The company has a strong cash flow, with a 49% improvement compared to the same period last year, primarily due to inventory reductions.

Negative Points

• HMS Networks AB experienced a significant decline in organic growth, with a 33% drop in Q4, attributed to a weak market and customer destocking.
• The German and Japanese markets remain challenging, with continued destocking expected in Japan over the next few quarters.
• The company reported a decline in earnings per share, impacted by higher financial costs due to increased leverage and debt from acquisitions.
• Despite strong order intake, the company remains cautious about the market outlook, expecting recovery only in the second half of 2025.
• No dividend was proposed for the year, as the company focuses on deleveraging the balance sheet following significant acquisitions.

Q & A Highlights

Q: Red Lion's performance has improved significantly. Was this due to pent-up demand or market tailwinds? Also, will data center projects become a regular revenue stream? A: Red Lion's project business is inherently lumpy, with fluctuations in order size. This quarter saw large orders, including from Microsoft data centers for power monitoring. While we expect more orders, the business remains variable. Data centers and other sectors like oil and gas show promise, but quarter-by-quarter results may vary. - Staffan Dahlstroem, CEO

Q: China was a strong performer in Q4. What is your long-term view on the Chinese market, especially given the market share dynamics? A: Initially, our Chinese business was driven by Western companies. Now, domestic players are our main customers. We focus on unique products like Ixxat and Anybus, which have high technical value. However, local competition is strong, especially for products like Red Lion. Our strategy is to focus on unique offerings that provide value in China. - Staffan Dahlstroem, CEO

Q: Can you provide insights on OpEx levels and expectations for 2025? A: In Q3, we adjusted bonus provisions due to underperformance. Q4 was normal, but overall bonuses were low due to the organic drop. If we meet targets in 2025, bonuses will increase, impacting OpEx. Excluding bonuses, we expect OpEx to remain stable, with some salary inflation. We will maintain cost-saving measures until we see clear growth trends. - Joakim Nideborn, CFO

Q: With order intake improving, why do you foresee softness in early 2025, with recovery in the second half? A: Order intake improved slightly across the board, but Q4 included one-off project orders, like SEK100 million from Red Lion. We are cautiously optimistic but do not expect the same order level to continue immediately. We anticipate gradual improvement, particularly in the second half of 2025. - Joakim Nideborn, CFO

Q: How are US tariffs affecting your business, and what is your sourcing strategy? A: US customers are generally positive despite tariff discussions. Our products are not highly competitive, and we can pass costs to customers. Red Lion's US-based R&D and manufacturing enhance our supply chain flexibility. We are prepared for potential trade issues, with strategies to mitigate impacts, especially with our Canadian EMS partner. - Staffan Dahlstroem, CEO

For the complete transcript of the earnings call, please refer to the full earnings call transcript.