Bittium Oyj

OMXH:BITTI

Earnings Call Transcript 2020-Q2

[Hannu Huttunen, Chief Executive Officer]

Okay. Good morning, everyone. Welcome to this Bittium Corporation Half Year 2020 Financial Report Meeting. My name is Hannu Huttunen. I'm the Bittium's CEO. And together with me here in this morning is Mr. Pekka Kunnari, the company's CFO.Agenda for this morning's meeting is as shown here. So first, I will go through the main events during the first half of the year, then Pekka will discuss about numbers in more detail. And then I'll get back about the outlook for the rest of the year.Right. So if we start from the defense and security side of the Bittium, of the corporation. We achieved an important milestone by starting the actual production deliveries of brand-new Bittium Tough SDR handheld radios, which is a very important step for us to expanding our product portfolio in the area of tactical communications and thus enabling the growth in that area of business.We also continued our good cooperation with the Finnish Defense Forces in other areas of our tactical communications product portfolio. We got an order for the next phase of development of ESSOR waveform, the common European wideband tactical waveform development. We also got an order about our TAC WIN system products and also order about our new Comnode terminal products.In the international side of our defense business -- or defense and security business, we got an important opening by being selected as one of the partners in the brand-new program financed by European Defence Industrial Development Programme. This is the first program that we are participating financed by that instance, which is a -- some time established a new common European organization, taking care about Europe to developing our defense together.Our -- the program is about autonomous systems, and our part of the work is to take care about this secure and robust wireless communications, enabling this or the number is -- system management and operation, which is really the core of the company. And thus, this fits very well to our overall portfolio, and we are really proud of being selected to that as a best company in Europe to take care about that part.Also, when we take a look about our market opportunity in the tactical communications, it was an important step that Germany, finally, officially, joined the ESSOR program, meaning that the position of ESSOR in the competition between the different waveforms is getting stronger and stronger. And this means that there will be more and more countries that will take ESSOR into use, regardless whether they are part of the common development. But this means that they -- or we strongly believe that they -- this means that ESSOR will be the -- at least the de facto standard of the wideband tactical communications in the future. And that, of course, means expanding market opportunity or potential market for us. More and more countries using ESSOR, more and more opportunities for us to offer our brand-new and really highly competitive ESSOR product portfolio for those cases.The terminal side of the business, we continued the active negotiation and discussion with the Mexican government authorities about expanding or speeding up the rollout of the Mexsat system. Mexsat system, the satellite system is naturally in use. There are some thousands of users in there, but the targeted volumes that are tens of thousands users, they are still to happen and they -- we still see that main opportunity for Mexsat is ahead of us. And there has been common planning together with the customers about that.Unfortunately, the coronavirus pandemic situation in Mexico is quite challenging at the moment, and that clearly has slowed down the certain processes in the country. So they have not been able to go through the certain meetings, for example, because meetings are not allowed because of the pandemic, for example.So remains to be seen that what kind of impact that situation will have to our opportunity in this year to increase those terminal volumes. Still, we strongly believe that the system will be taking into use, but now the -- again, the discussion is about timing that they -- how fast the speeding up the rollout will happen in Mexico.In the secure handset side, we were proud to launch our new version about our Bittium Tough Mobile 2 product, which is the -- as far as we know, the most secure smartphone in the market at the moment. And this [ server and SIM ] meaning confidential here means that this is hard and it's so much that it can be certified to the confidential security classification level. And in our understanding, there aren't any other smartphone that can be classified to such a high data security requirements. How have we done this is that we have this unique 2 separated operating system running in the same hardware.We also expanded our offering and value-add there to the public safety communications by integrating this eMBMS functionality to our new product, enabling really capacity efficient way of sending messages in the public safety, safety networks and thus being one of the important enablers the customers to move from the, let's say, second generation Tetra or P25 networks towards the new digital LTE 4G-based public safety communication systems.In Finland, we were proud to partner with Virve Tuotteet ja Palvelut, which is a -- really, the key player in the local governmental communication market providing the current Tetra terminals and services to customers, and now when Finland starts to move towards the new Virve Tuotteet, the new LTE-based public safety communication system being our important partner to provide these products and services, also running some of the services to the customers in helping them to get the full value out from the new opportunities provided by this new data-based, LTE-based public safety networks.In the medical technology side of the company, we continued our really good partnership with the U.S.-based company, Preventice, which is our most important customer in that area. Also, we had a good progress in the other countries by developing further our market access by finding new partners and distribution channels to our products. So we've proceeded quite well in the area of medical technologies as well.New offering in there. We introduced this Bittium MedicalSuite product, which is a system product that enables customers to manage the fleet of the EEG or EKG devices, providing the secure communication solutions, wireless communication between devices and the cloud. Also, we can run different kind of algorithms in the cloud by helping customers, doctors to do diagnostics and manage the, for example, customer information. So you could say that this is like a holistic solution for our customers to run these businesses and provide these services to their customers.Also important milestone in the area of neuro technology, we got the medical approval -- medical CE approval to our new Bittium BrainStatus product, which is a -- you could say, really a new way of doing EEG measurements. So really, light, easy to use, wirelessly connected, enabling ambulatory use of the EEG measurements as well as many, many other things.So approval for that, meaning that now we can start to sell the products to European customers. Naturally, we are in the really early phase in there, so it will take some time before we will get processes through. But in the long run, we see really great opportunity for us in the area of EEG. We believe that the clinical use of EEG will be growing a lot in the future, enabling -- enabled by this new hardware product concepts that we are bringing to the market as well as the developing algorithms. So AI-based algorithms enabling a much more efficient diagnostics, and they are helping doctors and customers to make efficient and productive diagnosis of EEG-based challenges or problems also.In the product development service side of the business, we introduced a new version of our automotive platform. So we have this HMI -- Android-based HMI implementation, and we were bringing some AI-based solutions to there and enabling the UI to be adaptive based on the, for example, emotional status of the drivers. So really nice new value-add offering in that area of the business.Right. If we then take a look about the unfortunate coronavirus pandemic and impacts to Bittium. Typically, our sales cycles are long. So it can take several years for us to close the deal in the area of tactical communications, for example. And then also, the delivery phases take some -- quite a long time. So, so far, if you take a look at the first half of the year, the impact for us hasn't been remarkable. So we've been able to proceed quite as planned with our business. But of course, if the situation continues in the long term, it starts to have a possible impact to our business and operations.So because of this long sales processes or cycles, it means that they are -- you could say that always in the system product RFQ, for example, there are phases of trialing in the field and testing the products, et cetera, which means that somebody needs to travel to that specific country and do the trialing and showing the technology capability to the customer and to enclose cooperation with the potential customer in there. And as long as the current restrictions are in place, it's very difficult to do those trials, for example, in practice.So longer this situation stays as it is today, the more it postpones also to our work cases in the -- or our progress in the sales funnel development. So potentially, this starts to have an impact for our growth opportunities in the short or medium term.In the long run, of course, this will be over one day and it will not change the big picture that there will be increasing need of more than digital communications in the tactical communications area as well as, for example, digital -- new digital remote solutions in the medical business, but this may have an impact for us in the short to medium term.Also, when taking a look to the global economy, it has -- it's obvious that the public economics will have some challenges in the short to medium run. So there may be some budget cuttings happening also in the areas that -- where we are offering our products and solutions. And if that's the case, that may have an impact for our capability to develop our business in there.Typically also, especially when delivering these kind of system products, there's a requirement of factory testing or approvals by the customers, and that means that customers need to be able to travel here to see the production facilities and [ accorded ] the test laboratories to see that the product really fulfills all the requirements that we have been promising, et cetera. So that also requires traveling, and as long as traveling is not possible, it may delay also our deliveries from that point of view.Then I think that this is true to all of the companies in the world that they -- these restrictions, they make it more difficult to gain new customers. Of course, you cannot go and meet the customers, so it's much more difficult to convince them to -- or tell them that how great solutions and products we do have.Naturally, we have been increasing our efforts in the digital space a lot. So doing virtual presentations, demos, et cetera. And our marketing and sales have been doing good work in there, but still it's slowing down a bit the development of the sales funnel.So far, we have been managing quite well when it comes to component availability. So that has not had a significant impact to our delivery capabilities during the first half, but there are some challenges in the certain technology areas, and that's one risk that can happen.We also have been able to manage the security or health of our personnel quite well. We haven't had any remarkable impacts from the pandemic so far, and we are really happy about that, so that we have been able to keep our personnel safe and health. But naturally, if something would -- different would happen, it could have an impact to our operations and business in the -- from that point of view.Especially in the area of health care in our business portfolio, we saw the development during the first half, let's say, during the spring that the health care organizations were pretty much focusing to the pandemic here, and they were delaying or postpone all the other type of care and diagnostics also. People were afraid to go to hospital because they are afraid to get infected in there. And that certainly has had an impact to the amount of diagnostics that customers have been doing and thus also impact the demand of the equipments for this diagnostics.But we see that this is temporary because our offering in there is very well suitable to be used even in the pandemic situation because we are providing digital remote solutions that can be run even without any personal contacts. So very well capable to be used even in the difficult pandemic situation. And also increasing cost pressure will, in our thinking, speed up the need to digitalize the health care services and diagnostics, which will be then in the long run rather increase our accessible market and bring new opportunities for us than reduce those.Also, in the area of mobile secure communications because everything has been more or less remote during the spring and most probably will continue like that for some time, that means that they also -- really confidential issues, you need to be capable to process those remotely. And that most -- that probably brings in opportunities for us for providing our solutions and technology for the secure communications.Okay. I now hand over to Pekka. Thanks.

[Pekka Kunnari, Chief Financial Officer]

Thank you, Hannu. And also hello behalf of me. Let's look first our net sales and profitability numbers. First, second quarter this year, net sales -- total net sales, EUR 25.3 million, and it increased by -- almost by 7% from the comparable period last year. 73% of our net sales was product-based and 27% was service-based. The product-based to be delivered our regular products related to tactical communications systems. Also, Tough Mobile smartphones was delivered and medical products and safe [ mode ] softwares. But also, we are happy that we started first deliveries of new SDR handheld products, which happened during Q2.Operating result -- or actually, operating profit for the second quarter was EUR 2.7 million, and this was roughly 11% counted from the net sales. And when we look to last year, it was EUR 5.2 million. So also, our net sales grew by 7%. Our net -- our operating result was lower than last year. And there's twofold reasons for that. First that the product mix of delivered products was different between those quarters. And that's why gross margins for second quarter this year was lower than a year ago. And also, our depreciation cost was higher between those quarters. And that was the reason that although the net sales grew, at the same time, the operating profit was lower than 1 year ago.And when we look the net sales divided by products and services, we see that product-based, let's say, has increased by a bit more than 10%. And at the same time, service-based net sales declined by 2%.And looking the first half net sales and profitability. The net sales for first half was EUR 42.5 million, and it grew very strongly. 29% was the growth rate there. And operating result for this period was EUR 2.9 million. It was about 7% of total net sales.And again, when we divide this net sales by products and services, we see that very strong growth in the product-based net sales, it grew more than 62%. And at the same time, unfortunately, the service-based net sales declined by 14%. And also to look into the charts, we see that very good and steady growth of products, the share of product business during the last 2.5 years, and at the same time, the share of services net sales has declined.R&D investments. We continued strong work with our R&D projects, and we invested EUR 12 million for those, and EUR 7.4 million of that was capitalized in our balance sheet. So EUR 12 million is representing about 28% of our net sales. So still strong investment phase ongoing, although last year, it was much more higher. It was roughly 39% of net sales. So this is declining, but anyhow, still strong.And we continue the investments to our Tough SDR soldier and vehicle radios and also additional investments to tactical communication systems. Tough Mobile 2 smartphone was under development project, and also biosignal measuring and monitoring products was developed.Looking cash flow. During the first half, the total cash burn was EUR 8.8 million. And looking to also activity by activity, operating activities was roughly -- a bit over EUR 0.3 million positive. And major item there was increased networking capital. We delivered quite a big amount of products in June. And all of that, the sales are standing in accounts receivables that increased in net working capital-wise, and also our inventory is higher than it was at the beginning of this year.Investing activities totaled roughly -- a bit more than EUR 8 million, and most biggest part there is R&D investments, as said, EUR 7.4 million.Comparing to last half 1 year ago, it was positive. Cash flow -- total cash flow about EUR 2.6 million. And there was major items that we drew bank loan of EUR 20 million in that period. Also, we paid dividends, EUR 5.4 million, in that period 1 year ago. And during this first half, we did not pay any dividends.And then looking to assets and liabilities. Our total balance sheet is roughly EUR 162 million. And looking to assets, how that is divided between noncurrent and current assets, 52% of assets are noncurrent, roughly EUR 84 million, and half of that are our capitalized R&D investments of EUR 44 million.Current assets, EUR 79 million. And the major items are inventory, EUR 21 million; and trade and other receivables, EUR 31 million. And as said, trade receivables are quite high now in the end of June. Also, the cash and liquid assets, EUR 26 million. And moreover that, we have an unused credit limits of EUR 20 million, so our cash and financing situation is strong.And equity and liabilities side, equity ratio is still very strong. 72% is the equity ratio, and liabilities side, we can see that the net gearing is still a very good position. The number here is negative, minus 3.5%. So still a strong balance sheet and in good shape.Okay. That was about our profit and loss and cash and R&D investments and assets and liabilities. And then Hannu will continue about the outlook for the second half of this year. Thank you.

[Hannu Huttunen, Chief Executive Officer]

Okay. So a few words about the outlook for the rest of the year. I guess that this is pretty much true for all the companies. Companies at the moment that is very difficult to estimate how this coronavirus pandemic situation will develop and what kind of impact it will have to our business. And thus it's a -- you could say that there are clearly more uncertainties for giving any guidance than in the normal situation.I said so far, this virus situation has not had a remarkable impact to our operations, but if it continues for a longer time, it may have, and that creates certainly these uncertainties also to us. It especially worries me to see the development of the virus situation in Europe being, however, our most important geographical market area -- areas, especially in the area of defense and security. And if the situation stays like that, it will start to have an impact to our sales funnel development, for example.Also, as discussed, the situation in Mexico will -- could potentially have an impact also for this, even for this ongoing year if things are more or less frozen in the Mexico because of the situation.However, when we look our current forecast, we don't see reason to change the guidance that we have -- that we gave in the beginning of the year. So we expect that our net sales will grow from the last year and our operating profit be roughly in the same level than it was a year ago. But naturally, as said, because of these uncertainties, we closely follow the situation and the development. And of course, as always, if needed, we will update the guidance.Okay. So this was the presentation today. Thank you, everyone, for listening and participating. Thanks.