Embedded Software Shift And IAR Integration Will Support Stronger Long Term Prospects

Catalysts

About Qt Group Oyj

Qt Group Oyj provides development tools and quality assurance products for building complex embedded software and graphical user interfaces.

What are the underlying business or industry changes driving this perspective?

• The broader shift toward more software rich devices and graphical user interfaces across automotive, consumer electronics, medical and other embedded markets supports demand for Qt's core development tools over time, which can feed through to higher license revenue and distribution license income.
• Rising software complexity and the spread of AI generated code are increasing the need for robust testing, which positions Qt's QA tools as a critical part of customers' workflows and can support growth in QA license revenue and potentially higher overall earnings.
• The acquisition of IAR Systems expands Qt's role across the full embedded development cycle. This creates cross sell potential between compilers, Qt tools and QA products that can lift average revenue per customer and improve operating leverage in the medium term.
• Qt and IAR both serve safety critical segments such as automotive and medical, where regulatory requirements make switching tools difficult. This can support stable renewals, improve visibility on license revenue and help protect net margins.
• Customer projects are generally continuing with fewer developers rather than being cancelled, and churn is described as unchanged. This suggests an intact customer base that can scale license volumes again when conditions improve, with a direct impact on top line growth, EBIT and net profit.

Assumptions

How have these above catalysts been quantified?

• This narrative explores a more optimistic perspective on Qt Group Oyj compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Qt Group Oyj's revenue will grow by 15.1% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 12.3% today to 22.1% in 3 years time.
• The bullish analysts expect earnings to reach €74.5 million (and earnings per share of €2.96) by about July 2029, up from €27.2 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as €21.3 million.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 28.2x on those 2029 earnings, up from 22.0x today. This future PE is greater than the current PE for the GB Software industry at 19.9x.
• The bullish analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.18%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• A prolonged softness in embedded markets such as automotive and consumer electronics, where customers remain in saving mode and keep projects on a low flame, could keep average deal sizes constrained and weigh on license revenue and earnings.
• If customers continue to cut development headcount and tightly optimise the number of seats they pay for, including a lasting shift from 3 year to 1 year contracts, the company may see slower top line growth and less upfront revenue recognition, which could pressure EBIT and net profit.
• The higher cost base built for growth, including a headcount of 922 and added R&D and customer facing resources, may be too heavy if revenue stays close to flat. This would keep EBIT margins and net margins below management’s past expectations.
• The integration of IAR, including a potential shift from perpetual to subscription licenses, could temporarily dilute group profitability if subscription uptake is slower than planned or if one off and transition costs stay elevated. This would weigh on operating margins and net profit.
• If larger license deals continue to be postponed and discount pressure rises at year end as customers push to close contracts on their terms, the mix could skew toward smaller or lower priced agreements. This could limit revenue growth and hold back earnings.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Qt Group Oyj is €38.0, which represents up to two standard deviations above the consensus price target of €28.5. This valuation is based on what can be assumed as the expectations of Qt Group Oyj's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €38.0, and the most bearish reporting a price target of just €15.5.
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2029, revenues will be €338.0 million, earnings will come to €74.5 million, and it would be trading on a PE ratio of 28.2x, assuming you use a discount rate of 8.2%.
• Given the current share price of €23.54, the analyst price target of €38.0 is 38.1% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.