Nextcom in the First Quarter: More EPC Contracts Meet Margin Erosion and Negative Cash Flow

Nextcom gives only a partial answer in the first quarter to the question raised by the annual report: there is more work, more contracts, and a clearer shift toward renewable energy, but conversion quality is still weak. Revenue rose to NIS 113.9 million, and during the reporting period and shortly after it the company reported EPC contracts and additions totaling about NIS 324 million, on top of a Prime Energy agreement whose total scope is now estimated at NIS 383 million. That is the positive side. The less comfortable side is that the gross margin fell to 8.6%, both segments showed lower gross profitability, and the path from revenue to net profit was blocked by finance expenses and losses from investees. Operating cash flow was negative NIS 31.1 million, mainly because customers increased while suppliers and payables declined, so the quarter does not prove that the work pipeline is beginning to fund itself. The next proof point is not another contract announcement, but actual execution of the energy projects without further margin erosion and without working-capital consumption that erases the benefit of higher revenue.

Revenue rose, but both segments lost margin

Nextcom is a project-execution company operating in two areas: communications infrastructure and renewable energy. In this model, orders and backlog are necessary but not enough. Value is created only when a project moves from planning and procurement to execution, revenue recognition, collection, and the release of guarantees or working capital. A quarter with more revenue and more contracts can still weigh on shareholders if margin erodes and cash leaves before project delivery.

Revenue rose 13.4% from the comparable quarter, from NIS 100.4 million to NIS 113.9 million. Most of the increase came from renewable energy, where external revenue rose from NIS 44.0 million to NIS 54.4 million, mainly due to ground-mounted solar farms. Communications infrastructure grew more moderately, from NIS 56.2 million to NIS 58.8 million. The work volume is still expanding.

But profitability is the more important line. Gross profit rose by only NIS 0.3 million to NIS 9.8 million, while the gross margin fell from 9.5% to 8.6%. In renewable energy, the margin fell from 10.6% to 7.7%, and in communications infrastructure from 11.9% to 9.5%. Revenue increased in both segments, but every shekel of revenue left less gross profit.

One small distortion makes the quarter look easier than it is. In the comparable quarter, the electricity meter-reading activity recorded a loss of about NIS 1.8 million, while in the current quarter it had almost no effect. Without that relief, the margin erosion inside the two operating segments would have been even clearer in consolidated gross profit. The quarter is not operationally weak in every respect, but higher revenue is still not enough to change the quality of earnings.

New contracts add volume before they add proof

After the annual analysis on backlog conversion, the first quarter and subsequent events strengthened the order side. Energy signed two Powergen projects in March for about NIS 48 million, another project in April for about NIS 28 million, a high-voltage storage project with EDF in May for about NIS 65 million, and on May 27 signed additions to its agreement with Prime Energy for an estimated NIS 183 million. In Prime's case, the total scope of the agreement and additions is now estimated at NIS 383 million.

These are meaningful reports for a company with a relatively small market value, and they explain why the market can still see a growth story. But they do not close the debate. Some projects are expected to start only in coming quarters, some stretch into 2027 and even 2028, and consideration is paid by milestones. In the Prime project, work commencement is subject to a start-work order, and the maintenance services after delivery are not expected to be material to Energy. The contracts improve work visibility, but they do not replace proof of margin, collection and execution pace.

The timing risk is also clearer now. The war in early 2026 caused delays in advancing and completing projects, including grid-connection stages for renewable energy projects. At the same time, the company describes an unusual and continued increase in raw-material and input costs, changes in global supply chains, demand for equipment and infrastructure linked partly to AI and data centers, and possible effects on component availability and delivery schedules. For an EPC contractor, this is not just macro background. It is exactly where a large contract can turn into high revenue but lower margin if procurement, labor or delay costs move against the company.

Cash flow shows how much capital the pipeline needs

The relevant cash frame here is all-in cash flexibility after the quarter's actual cash uses. On that basis, Nextcom did not show an improvement. Operating cash flow was negative NIS 31.1 million, compared with negative NIS 5.4 million in the comparable quarter, and cash fell from NIS 79.0 million at the end of 2025 to NIS 48.7 million at the end of March 2026. Financing activity added only NIS 2.0 million net, mainly through short-term credit, so the cash decline was not merely accounting noise.

The reason sits in working capital. Customers increased by NIS 17.7 million, suppliers declined by NIS 17.4 million, and payables declined by NIS 7.7 million. Inventory declined by NIS 5.7 million and helped partly, but did not change the picture. In a project business, higher customers and lower suppliers mean that the company is funding more of the gap between execution and collection itself. That was the issue in the previous analysis on working capital and guarantees, and this quarter does not close it.

There is also a stabilizing side, but it does not remove the yellow flag. The company meets its financial covenants: current assets to current liabilities stood at 1.91 versus a required 1.1, equity stood at NIS 127.7 million versus requirements of NIS 34 million and NIS 50 million under the interest-adjustment mechanism, and equity to assets stood at 35.7% versus requirements of 20% and 23%. There is no immediate covenant pressure. But that does not mean the capital is free. Part of the cash is needed to support execution, part of customer receivables has already been derecognized through NIS 4.3 million of factoring, and net finance expenses jumped to NIS 2.3 million from NIS 1.0 million in the comparable quarter, partly due to the Series C bond expansion in July 2025 and a loss from remeasuring FX hedge transactions.

The next quarters need to show profit, not only work

The first quarter leaves Nextcom in a better place in terms of activity volume, but not in a cleaner place in terms of activity quality. Energy revenue is rising, more EPC contracts are entering the pipeline, and the market can identify an easy story: a lot of work against a relatively low market value. But margins fell in both segments, operating cash flow was sharply negative, and losses from investees still took NIS 0.8 million below operating profit. In Cressence and Fusion, there is still no change large enough to turn that thread from a source of volatility into a clear value option.

The counter-argument is reasonable. The first quarter may be a transition point: large projects are moving toward execution, the war and supply disruptions created temporary pressure, covenants are distant, and improvement may arrive when project milestones begin releasing revenue and cash. For that view to win, the next few quarters need to show three things: energy profitability that stops eroding, less pressure from customers and suppliers on cash flow, and updates on Prime, Powergen and EDF that show not only signing, but execution, delivery and collection. Until then, the quarter strengthens work visibility, but not its conversion quality.