Why is the RPM Global share price crashing 22% today?

This tech stock is having a tough session. But why?

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The RPMGlobal Holdings Ltd (ASX: RUL) share price is having a difficult time on Tuesday.

In early trade, the mining software solutions provider's shares were down as much as 22% to $2.17.

Its shares have recovered a touch since then but remain down 16% to $2.33.

Why is the RPM Global share price crashing?

Investors have been hitting the sell button today after the company released a trading update.

According to the release, RPM Global sold $50.4 million in software Total Contracted Value (TCV) in the second half of FY 2024. This brings its expected full year TCV to $77 million, which represents a 9.2% increase year on year.

This TCV comprises $75.4 million in subscription licenses (FY 2023: $65.8 million), $1.3 million in perpetual licenses (FY 2023: $2.9 million), and new maintenance of $0.3 million (FY 2023: $1.8 million).

Management notes that the $75.4 million in TCV software subscription sales will deliver annually recurring revenue (ARR) of $9.2 million. As of 1 July, the total value of ARR is $62 million, comprising $50.7 million from subscriptions and $11.3 million from maintenance.

It also highlights that as its software becomes more and more mission critical, mining companies are asking for longer subscription terms to ensure certainty of supply. For example, in the second half of FY 2024, the company sold $18.4 million in software subscriptions with a committed term of eight years and $6.4 million with a committed term of ten years.

Given how the above reads very positively, investors may be wondering why the RPM Global share price is sinking today.

Well, this appears to have been driven by softer than expected profitability during the year.

Softer profits

The release reveals that gross revenue for FY 2024 is expected to finish between $113 million and $114 million. This is up from $98.4 million in FY 2023.

EBITDA (before management incentives) is expected to be in the range of $18.7 million to $19.3 million, which is up from $15 million last year.

And finally, profit before tax (pre management incentives) is forecast to be in the range of $14 million to $14.5 million. This is up 52% to 58% year on year from $9.2 million.

This was lower than forecast, which is weighing on the company's shares today. Management commented:

The lower than forecasted profitability is due to reduced perpetual license sales and the timing of subscription licenses signed during the second half of FY2024.

It is also worth noting that not all of these profits will be retained, with the company intending to reward its employees handsomely. It advised:

Given the growth in TCV, revenue and profitability in FY2024, the Company expects incentives (shared across an increased number of employees) to be in the range of $3.5 million to $3.9 million for the FY2024 year (FY2023: $3.0 million).

Despite today's weakness, the RPM Global share price remains up over 60% since this time last year.

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended RPMGlobal. The Motley Fool Australia has recommended RPMGlobal. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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