WOOD Flash – AROBS Transilvania Software: FY24E budget cut, but 3Q24 restructuring may mark an inflection point

The main message from the 3Q24 earnings call is that customers, particularly in the automotive sector, are sitting on the budgets earmarked for outsourced work, as they reassess their own priorities. While this happens. AROBS is positioning itself to capture new business where customer demand is strongest – cyber security, AI and data engineering. This quarter, management did put personnel and other opex cuts in place, the results of which are visible already: it reversed the gross margin erosion of past quarters (by 170bps qoq), which boosted the 3Q24 adjusted EBITDA margin by 212bps qoq, to 15.4%, when combined with the lower opex. Furthermore, it addressed the SOP remuneration, which should now go forward at lower levels (also reducing the overhang of employee shares, which have weighed on the share price). The updated FY24E budget drives home the extent to which the business has underperformed over the past several quarters; however, we believe that it may be conservative in view of the steps on the costs side taken in recent months.