Emet in 2025: the software engine is working, but FX and working capital still set the ceiling

Getting To Know The Company

Emet is still, first and foremost, a large IT integration and services group, not a pure software company. That matters, because a quick read can stop at record revenue of ILS 1.497 billion and miss the real issue. The real issue is that the group is trying to shift its economic center of gravity toward software, digital, expert services and higher-value activity, while its large infrastructure engine remains highly exposed to the dollar, inventory timing and the lag between supplier invoice and customer delivery.

What is working now? The software, cloud applications and digital segment no longer looks like a side story. It finished the year with revenue of ILS 418.4 million and operating profit of ILS 24.3 million, up from ILS 18.5 million in 2024. That is already 38.9% of group operating profit, even though the segment contributes only 27.9% of revenue. That is a real change in the group’s economic mix.

What is still blocking a cleaner read? First, FX. The company itself quantifies a hit of about ILS 13.8 million to gross profit and operating profit in 2025, and about ILS 18.9 million to net profit, from the sharp appreciation of the shekel against the dollar. This is not an abstract currency risk. The group buys equipment, receives it, performs integration and testing, and only then delivers and bills the customer. When the shekel strengthens during that chain, margin gets squeezed. Second, working capital is less clean than the headline suggests. Trade receivables fell, but accrued income rose sharply.

That makes 2026 look more like a proof year than a breakout year. If the software and services mix keeps improving, if the unified campus and rebrand turn into real operating synergies rather than just a branding event, and if accrued income starts converting into cash instead of continuing to build, the story will read differently. If not, the market is likely to keep reading Emet as a large integrator with volatile margins, even if the strategic language already sounds far more software, digital and AI driven.

There is also a clear screening layer here. Based on the latest market snapshot, the company’s market cap is roughly ILS 315 million, about one fifth of annual revenue. That does not automatically mean the market is wrong. It does mean the market is still not willing to pay for Emet like a clean software platform. With short interest at only 0.07% of float, this is not a crowded bearish story. The core question is more basic: can the improving mix and services footprint actually translate into margin, cash and a cleaner business reading.

Four non-obvious points that matter right away:

• The software segment generated 38.9% of operating profit on only 27.9% of revenue. That is a real shift in economic weight.
• The apparent improvement in receivables is only partial: trade receivables fell by ILS 19.3 million, but current accrued income rose by ILS 19.5 million and long-term customers and accrued income rose by ILS 18.1 million.
• On a normalized / maintenance cash generation view, the company still generates cash, with ILS 54.8 million of operating cash flow versus ILS 26.8 million of net income. On an all-in cash flexibility basis, very little was left.
• The filing itself is not fully clean on headcount disclosure: the opening of the directors’ report refers to about 1,770 employees, while the detailed employee table shows 1,410. For a services-heavy business, that changes how one reads revenue per employee and operating leverage.

A quick economic map

Events And Triggers

Trigger one: the year software stopped being a side story

The most important event in 2025 is not a single acquisition or the name change. It is the fact that the software and digital segment kept improving even while the group as a whole absorbed a major FX headwind. Revenue in that segment rose to ILS 418.4 million and operating profit jumped 31.2% to ILS 24.3 million. Operating margin improved to 5.8% from 4.5% in 2024. For a company that has long talked about moving toward higher-value activity, this is one of the first places where the narrative clearly turns into numbers.

Trigger two: FX turned the infrastructure segment from a stable engine into a volatile one

In cloud infrastructure, computing and cyber, revenue rose 4.3% to ILS 1.092 billion, but segment profit fell 23.1% to ILS 38.2 million. This is not a demand problem. It is a margin problem. The company estimates the damage to gross profit and operating profit in that segment at about ILS 11.4 million, with pressure intensifying from the second half of the year. Put simply, the group sold more and made less on each shekel of sales.

Trigger three: rebrand and unified campus

After the balance-sheet date, the company approved the move to the Peax name and the transition to a unified campus in Petah Tikva. On the surface that looks like a branding issue. In practice it has operating potential: more collaboration across group companies, less fragmentation, and better cross-selling between infrastructure, digital, cyber and data capabilities. But that is still an option, not proof. Until it shows up in cost structure, cross-sell or margin, it should be treated as a managerial lever, not as a result.

Trigger four: portfolio expansion through acquisitions and overseas activity

In 2024 the group acquired 51% of EAG, a Cyprus-based company providing technology services, software development, digital products and implementation services for clients in Europe, Israel and the US. The deal also requires Emet to buy the remaining 49% after two years based on business performance. In 2025 the group also acquired an Israeli activity built around partnerships with Monday.com and Atera, for ILS 6.4 million in cash plus up to ILS 3.5 million subject to targets. The direction is clear: more software, more services, more international channels. The friction is just as clear: more intangible assets, more contingent consideration and more future cash claims.

Efficiency, Profitability And Competition

The operating story in 2025 sits on a sharp gap between two engines. One still brings most of the revenue. The other is starting to generate a much larger share of the profit.

Infrastructure: volume up, margin down

Infrastructure still accounts for 72.9% of group revenue. It grew in 2025, but operating margin fell to 3.5% from 4.7% in 2024. This is a heavy engine tied to procurement, inventory, dollar-linked pricing, delivery timing and competition. The company explicitly says that from mid-2025 the hardware and infrastructure market faced pricing volatility and supply challenges in memory components, partly because manufacturing capacity shifted toward AI-related products. On one hand that can support demand for architecture and integration services. On the other hand it puts pressure on both gross margin and working capital.

Software: smaller on revenue, cleaner on profit

Something more important is happening in software, cloud applications and digital. Revenue was up only 2%, but operating profit rose 31.2%. That means the improvement was not just about more volume. It was also about better economics: a richer mix of services, digital work, overseas activity and higher-value offerings. The company itself links the improvement to focus on growth engines, and the investor presentation adds the AI layer around data readiness, governance, architecture and enterprise implementation. That matters. Emet is not trying to build a story around selling a few more licenses. It is trying to sell the architecture, implementation and operating layer around AI and cloud adoption.

Competitive quality: broad customer base, some vendor sensitivity

On the positive side, no single customer represented more than 10% of group sales. That lowers anchor-customer risk. On the other side, in infrastructure there are two major suppliers, each representing about 14% of total group purchases and service expenses. That is not existential concentration, but it does mean the group’s largest engine is not infinitely free in commercial terms. In software, by contrast, there is no single major supplier accounting for more than 10% of total group purchases and service expenses.

The yellow flag that is easy to miss: headcount disclosure is not clean

The directors’ report opening refers to about 1,770 employees, including about 250 outside Israel. But the detailed employee table later in the filing shows 1,410 employees at year-end 2025, versus 1,388 at year-end 2024. That changes the economics of the services platform. On a 1,410 employee base, revenue per employee is about ILS 1.06 million. On a 1,770 base, it is about ILS 0.85 million. That is not cosmetic. It is a real disclosure problem. In an IT services company, where the investment case depends on how efficiently skilled labor is monetized, the filing should have been cleaner on this point.

Cash Flow, Debt And Capital Structure

Cash flow: two legitimate views, and they say different things

On a normalized / maintenance cash generation view, 2025 still looks fine. Operating cash flow came in at ILS 54.8 million, more than double net income of ILS 26.8 million. This is not a business where accounting earnings completely evaporate in cash.

But on an all-in cash flexibility view, the picture is much tighter. ILS 54.8 million of operating cash flow was almost fully absorbed by ILS 10.3 million of investment outflow and ILS 41.0 million of financing outflow. Year-end cash slipped slightly to ILS 67.3 million from ILS 68.5 million.

Where cash conversion actually got stuck

Anyone focusing only on the ILS 19.3 million decline in trade receivables could conclude that Emet released working capital. That is not what happened. Current accrued income rose by ILS 19.5 million, and long-term customers and accrued income jumped from ILS 12.6 million to ILS 30.8 million. At the same time, deferred revenue declined from ILS 52.7 million to ILS 36.9 million. In other words, part of the apparent receivables improvement simply moved elsewhere on the balance sheet, into less cash-friendly categories.

The implication is that the gap between profit and cash is not a survival problem, but it is clearly a quality problem. If the company wants the market to give more weight to its software and services mix, it will have to show that working capital is getting cleaner, not just that accounting profit is improving.

Debt, covenants and real cash uses

The balance sheet is not under covenant pressure. Equity stands at ILS 200.8 million, versus a minimum covenant of ILS 100 million. The permitted debt to EBITDA ratio at the company level is up to 4.5, while the investor presentation shows net debt to EBITDA of 1.63 at year-end 2025. So this is not a balance-sheet stress story.

But there is a real cash-use load. In 2025 the company paid ILS 10.4 million of dividends to shareholders, ILS 8.8 million to non-controlling interests, ILS 13.2 million of lease principal, ILS 17.1 million of interest, ILS 19.1 million of long-term debt repayment, and ILS 21.1 million to settle obligations for acquiring non-controlling interests. Some of this was offset by ILS 33 million of new long-term loans and a net ILS 17.3 million increase in short-term credit. So even if leverage is not threatening, cash available to common shareholders is much narrower than profit, or even CFO alone, would suggest.

M&A improves one layer and burdens another

The recent acquisitions make strategic sense. EAG strengthens the international services layer. The Monday.com and Atera-related activity strengthens the software portfolio. But every such move also has a counter-effect. At year-end, liabilities for acquiring non-controlling interests stood at ILS 22.9 million, and contingent consideration liabilities at ILS 3.6 million. In other words, part of the future growth already comes with a pre-attached cash bill.

Outlook

Four points to keep in mind before talking about 2026

• The real economic improvement is in software, not in the consolidated top line.
• Infrastructure is still too large for the group to be read as a clean services platform.
• Operating cash flow is still positive, but the quality is weaker than the receivables headline suggests.
• The new strategy makes sense, but 2026 still needs to show numbers, not just language.

This looks more like a proof year than a breakout year

The company does not provide hard quantitative guidance for 2026, but it does set a direction: strengthen its position in the Israeli IT market, expand expert and services exposure, grow overseas activity, continue M&A, and deepen the product and tool set around AI. The key question is not whether those intentions are sensible. They are. The key question is what kind of year they create. For now, the answer is a proof year.

For the market to read the coming year as a real improvement in business quality, four things need to happen:

1. The software segment needs to keep growing profit faster than revenue, rather than slipping back toward the 4% operating margin zone.
2. The infrastructure segment needs to prove it can protect margin better in a volatile dollar environment, whether through pricing, faster cycle times or a higher services mix.
3. Accrued income needs to convert into cash, otherwise every improvement in earnings will still look partial.
4. The unified campus and rebrand need to start showing up as efficiency or cross-sell rather than just presentation language.

The key point here is seasonality. The company itself says the fourth quarter contributed about 43% of annual operating profit, and that the first quarter is usually relatively strong as well. So anyone reading 2026 only at the full-year level will miss the main thing: the first half needs to show that software continues to improve the mix before the year-end seasonal tailwind arrives.

What the market may miss on first read

The obvious number is the decline in net profit. The less obvious number is that software segment profit is already approaching the scale needed to matter for the whole group, even though the revenue base is much smaller. If the shekel stops strengthening as sharply, or if the group improves its pricing pass-through and timing discipline, the operating leverage from the stronger software mix could show up faster than the annual headline implies.

On the other hand, the market could also miss the fact that the fourth quarter, despite strong seasonality and revenue of ILS 450.9 million, still delivered net profit down 18.8% versus the prior-year quarter. That means even when the year gives the company its best seasonal setup, the business still has not built enough immunity against FX and working-capital drag.

Risks

FX is not a footnote

Emet is exposed to the dollar on both purchases and sales, but not symmetrically in time. In 2025 this moved from a theoretical warning into an actual result. Anyone building a cleaner profit thesis has to assume either a more stable currency environment or a materially better ability to pass through or hedge the timing mismatch.

Quality of growth still needs proof

Record revenue does not automatically mean higher quality. When trade receivables fall but accrued income rises sharply, and deferred revenue declines, the company needs to show that growth is being converted into billing and collection on time, not only into accounting recognition.

The acquisition machine also creates liabilities

The recent deals are meant to strengthen the software and services engine, but they come with contingent consideration, obligations to buy out minority stakes, amortization of acquired intangibles and integration risk. That does not make the strategy wrong. It does mean that not all created value is yet accessible to common shareholders.

Labor market and cyber remain key operating risks

The company itself emphasizes strong demand for experienced professionals, rising cyber complexity and the importance of retaining human capital. That fits the business model, but it also means the core asset is expensive and hard to scale carelessly. If Emet cannot retain expertise and price it correctly, the whole thesis around improving services quality weakens quickly.

Short-Seller Positioning

Short data does not currently support a thesis of a market that sees a severe downside distortion here. Short float stands at only 0.07% versus a sector average of 0.72%, and the latest SIR is 0.79 versus a sector average of 1.339. That is almost negligible for a technology name with a transition story.

The right read is not that the market is bullish. It is that the market is not expressing skepticism through an aggressive short position. If skepticism exists, it sits more in valuation and in waiting for proof than in a crowded bearish trade.

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Conclusions

Emet enters 2026 with two stories living side by side. On one hand, the software and services engine looks stronger, more profitable and better aligned with AI, digital transformation and expert-services demand. On the other hand, the infrastructure engine is still too large, too dollar-sensitive and too tied to working-capital timing for the market to give the company full credit for a structural shift already.

The main blocker is not leverage or covenant risk. It is quality. Can the new profit base also show up in cash, and can software keep pulling the center of gravity fast enough to offset infrastructure volatility? That is what will shape the market reading in the short to medium term.

Current thesis in one line: Emet is building a real software and services engine, but it has not yet proven that the engine is large enough to clean up the group’s FX sensitivity and cash-conversion friction.

What changed versus the old read? In 2025 it is much harder to treat software as a decorative strategic layer. It has become a real profit engine. What did not change? Dollar exposure, sharp seasonality and the need for accounting improvement to turn into cash.

The strongest counter-thesis: the whole mix-shift story is overstated because infrastructure still represents nearly three quarters of revenue, and the software improvement is still too small to materially change the total business profile.

What could change market interpretation over the coming months? Mainly three things: continued software margin improvement, a visible slowdown in contract-asset build, and evidence that infrastructure can live with dollar volatility without giving back so much margin.

Why this matters: if Emet can show that the new profitability rests on a services and software layer that also converts into cash, it will stop being read only as a large integrator and start being read more as a higher-quality IT services platform.

What has to happen over the next 2 to 4 quarters for the thesis to strengthen? Software segment profitability needs to hold or improve, cash conversion needs to look cleaner, and the infrastructure segment needs to show it can handle dollar volatility with less margin damage. What would weaken the thesis? Another year of record revenue without better cash, or another demonstration that every round of shekel strength sends the group back to the same place.