Bittium Oyj

OMXH:BITTI

Earnings Call Analysis

Earnings Call Transcript 2021-Q4

[Hannu Huttunen, CEO & Chairman of Management Group]

Okay. Good morning, everyone. Welcome to Bittium Corporation Financial Statement 2021 Review Meeting. My name is Hannu Huttunen. I'm the Bittium CEO, and we also have Mr. Pekka Kunnari, Bittium CFO, present here today. Agenda for today's meeting is as shown here. So first, I'll go through highlights from the last year, then Pekka will discuss numbers in more detail and then we'll have a few words about the outlook for this started year 2022. First of all, our fourth quarter '21 was very good. I'm personally very pleased about our performance during that quarter. We were able to exceed our strategic targets to grow more than 10% and operating profit level more than 10%. So that quarter was really good. When it comes to whole year '21 numbers, the sales growth was in the target, but profitability was still a little bit below the long-run strategic target. Okay. If we start discussion by going through the tactical communications side of the business, this is an area in our business portfolio that was impacted most by those 2 challenges, global challenges that exist at the moment also in the world. First of all, the shortage of components, especially semiconductors, that had a remarkable impact for our '21 numbers in the tactical communications side. We had challenges to purchase all the needed components. And as a matter of fact, we did not -- we were not able to produce all the products that we should have been able to deliver during the last year. And then on the other hand, very competitive situation in the component market has led the component prices to be much higher than the typically -- especially in this kind of spot market situation where the components are sold, not from the normal distribution channels direct from the manufacturers or [ authorized ] distributors, but this kind of special batches that are available in the market, the prices can be even 50x higher than they typically are. So that puts pressure to the gross margins as well. So this was one of the challenge in the tactical communication side of our business during the last year. Then on the other hand, the market opportunity that we are mostly targeting in our tactical product offering, it's the renewal of the command and control systems and then required communication systems that are capable also today. So this is clearly the trend that we see happening in the market and demand is there. But then on the other hand, these kind of big projects where you renew the whole fleet of communication products and you renew the command and control systems, they typically require a lot of physical cooperation. So you need to be able to do the field testing together, to do the integration work together, et cetera, and that has been quite restricted to the COVID-19 pandemic. So clearly, when it comes to market, we did not see as many openings of [ RFx ] processes in the different countries that we would have expected. Luckily, towards the end of the year, we see the trend that this market starts to normalize. So we see more and more these openings happening. In the long run, we are confident that market opportunity is there. So it has not disappeared. It's quite obvious that they -- more than situational awareness systems and command and control systems based on that are critical for the performance of the battle groups. And clearly, this kind of renewable projects will take place in the long run in every country that they could care of, [ the defense ].In Finland, we continue in the long run very good cooperation with our domestic customers. We were able to finalize the product development phase of our brand-new Tough SRD radios, handheld and the vehicular radio. And this project, this cooperation project moved towards like a normal project where customer is preparing the use of the operational -- or taking products to the operational use in the organization. So we expect the next batches for the extended field trials and the first units to be equipped with those products in this year, next year. And then from year 2024 onwards, we believe that they -- we will reach the level -- or customer will reach the level where they start to take the products to the wider use, to the operational use, and that means that we expect that volumes for us would be according to the Frame Agreement that we have signed with the customer in 2017. First year 2024 and then onwards. We also got the good orders and good deliveries of our existing tactical communication products and systems from the Finnish Defence Forces. So strategically very, very deep good cooperation partnership continued well during the last year.In the international market, we continued good cooperation with our existing customers, most important being Austria and Estonia. We delivered both products and integration work to those customers. We also made quite a few smaller deliveries to other international customers. So although the COVID-19 was -- or did impact to the market, we, anyway, were able to proceed with several cases. We also -- our partnership company ESSOR was able to achieve the official approval for this HDR Base Waveform during the last year. We actually are the first company in the world that has taken this waveform and use in our brand-new Tough SDR products. That was an important milestone for us being a future high data rate tactical way for the handheld and vehicular radios to the battle groups. The scope of ESSOR was also extended a bit, the new different type of waveform development was started during the last year, and we are naturally part of that development also in the future. Then the secure communications side of the business, meaning the Tough Mobile 2 products and related software and applications. That market developed well. During the last year, we saw increasing interest to the ultra-secure mobile communication solutions. There were quite a few examples during the last year in the world stressing the vulnerability of the mobile communication when it comes to data security, maybe the Pegasus malware being the most known example, and that clearly generated demand towards our products and solutions and that business developed well during the last year. We also expect that development to continue during this year, so good progress in here. We also started the exclusive cooperation with our partner in Mexico when it comes to comes to delivery of Mexsat satellite terminals and that went well. We were able to deliver good volumes to the Mexican government. Also in there, we expect this development to continue during this year. Right. Then the medical technology side of the business portfolio. We also like saw like [ sort ] temporary decrease of the demand in that market when the COVID-19 pandemic started because at the beginning of the pandemic, it looked that all the health care systems and providers were focusing only to the COVID and diagnosis and other health care problems got a much less attention. However, this was not -- did not take too long a time. And we saw that market was already quite normal from that point of view regardless of the COVID during the last year. There was a good demand to our products. We also launched to the market the -- our new Bittium Respiro product and related software and analysis tools for the sleep apnea diagnosis. We believe that this is a good growth opportunity for us in the longer run. What has delayed us a bit in that business has been this European MDR approval process, the European medical product approval was renewed during the last year. And this new process is a bit more complicated than the previous one and also the authorized certificate houses are quite crowded. So getting this medical approval for our Respiro product in Europe has taken a bit longer than expected, now, at the moment, we believe it looks that we will get the approval during the second half of this ongoing year. In our ECG devices side, heart analysis, year was really good. We had good volumes in -- the most important customer for us has continued to be Preventice in U.S. and biggest market for us. But also, there was a good progress in other countries and for example, in Europe with other customers. We introduced this new Bittium OmegaSnap electrodes also during the last year and have received good feedback from those. In the EEG side, the -- maybe that's an area in our Medical Technology business that was impacted most of the COVID-19, and that's because of the fact that our first main application area there in our Bittium BrainStatus product is the analysis of the patients' recovery probability in the intensive care units. And intensive care units have been naturally quite crowded because of the COVID-19, and there hasn't been too much capacity in those customer organizations to take new technology into use. That has had an impact to our capability to progress in that product area. When it comes to software side, during the last year, we achieved a situation that our Bittium medical cloud software supports all of the measurement areas that we provide, heart, sleep apnea and brains. So that generates a good capability for the service providers to use in an efficient manner -- or provide services in the efficient manner for these different health problem areas, by using our 1 software platform. And also, maybe in the future, being able to combine the data and analysis results from the different health problem, health care areas and even maybe use machine learning to find totally new correlations and probabilities to even further improve the diagnostics that we provide. In last autumn, we published the agreement where we intend to purchase the minority shareholders or shareholding from the U.K.-based company called Technomed. That did not happen. There were some technical problems in the process, and we decided to terminate this minority shareholding [ purchasement ], but then on the other hand, we signed a long run cooperation contract with the Technomed then. And in the operational level, the cooperation continues as planned. Right. Then the R&D services market. Our main offering here in R&D services market is the development of whole devices or base station variants or typically something that involves also heart rate. And maybe that market was a bit more impacted of the COVID-19 than software development only. However, we saw that also during last year, that market started to recover slowly. So our business was quite stable here. Net sales is roughly in the same level than in the previous year. So we did -- we were not able to turn this business yet to growth, but we target to turn this business growth during this year. Also this business. We saw a few interesting new technologies or technological discontinuity in market share. First is open radio network architecture that will bring new players to the radio network market. And typically, these new players do not have such strong in-house competencies when it comes to development of radio network technologies than the current legacy big players have. And we believe that based on our long expertise and deep competencies about the radio technologies, we are in a good position to provide development services for those new players. Then we also were able to get the new important interesting customer in the area of satellite technologies. So that's another trend that satellite technology is used for the commercial communications. And in the new way, low orbit satellites and applications and systems based on those, that's clearly also one very important technology trend or development that's happening in the world. And we see that provides interesting opportunities for our R&D services. As said, we target to grow the customer base, of course, target to continue the good cooperation with the current customers also here in this area. But we have to admit that one thing that restricts our capability to grow in here is very tight employee market, especially when it comes to software professionals at the moment. So competition of the talent is really, really tough. And it will take some time to grow the resources in this area when needed. Good. Okay. Pekka, if you now go the numbers through. Thanks.

[Pekka Kunnari, CFO & Member of Management Group]

Thank you, Hannu. Hello, also on behalf of me, so I'm Pekka Kunnari, CFO at Bittium. Let's move to our financial numbers. First, the net sales, all in all, the last quarter last year was excellent also in number-wise. Total net sales for that period was 30 -- roughly EUR 30 million, and it grew almost 38%. And that was excellent, excellent achievement. And roughly 80% of that was product-based net sales, so EUR 23 million. And it divided by medical and defense so that medical products sales was a bit more EUR 7 million, and it also almost doubled compared to Q4 2020. That was very good development there and the Defense & Security side, net sales was roughly EUR 16 million and also it grew. The last, [ bit more 20% ] of total net sales was service-based, so a bit more than EUR 7 million, and it almost remain at stable compared to Q4 2020. All year numbers. All year, total revenue was roughly EUR 87 million. It grew almost 11%. And that was in line our long-term strategic target. And in that way, it was good achievement also. EUR 63 million of that was product based, and roughly EUR 28 million of that came to -- came from -- through the medical products. And the rest of EUR 35 million was Defense & Security-based net sales. As we can see, almost all that -- actually, all of that increase or growth of total net sales came from the medical technology products. So as I said, were EUR 28 million and it was roughly EUR 17 million in 2020. Service-based net sales was almost EUR 24 million, and it declined. So roughly EUR 1 million less than it was 2020. Then our profitability. Q4, operating profit was EUR 3.7 million, a bit more than 12% of net sales. And as we can see that when we looked at all those quarters during 2021, the first quarter was loss-making period. But after that, all those other 3 quarters, we made operating profit, we were profitable, but this last quarter was excellent. Of course, the nature of what this business is the total revenue and impacting also the operating profit, depends on how the product delivery times goes between different quarters. All year operating profit was EUR 3.2 million, almost 4% of the total net sales. In absolute terms, our revenue or net sales increased roughly EUR 9 million, but our EBITDA key figure was almost at the same level. So it means that our costs increased between 2020, '21. And there was -- one thing was the increased material prices, which declined our profitability and other was that we invested or used more money to develop our current products. So we have to do to maintain activities with those and when the product and product family is expanding more money is needed and used for that. So actually, let's look to R&D investments. During the last year, total amount was roughly EUR 20 million, this R&D investments, and it's representing roughly 23% of net sales. As we see that trend of compared to net sales, a declining trend in last 3 years. And when we had big investments R&D investments to do the new Tough SDR projects, and that is finalized. So also this total investment R&D had declined during last year. EUR 7 million of total investment was capitalized to balance sheet, and also it declined in 2020, we capitalized roughly EUR 14 million. But as I said, which impacted to our profitability was that the more R&D cost was in profit and loss statement. Last year, it was roughly EUR 18 million as it was roughly EUR 15 million in 2020. Also more -- focus of R&D investment changed a bit more from defense and security products to the medical products during the last year. Cash-wise, last quarter Q4 was positive roughly EUR 2.2 million. But unfortunately, all the year, cash flow was negative roughly EUR 3 million. Anyhow, it went -- whether it increased compared to 2020, so it was roughly EUR 8 million better. Operating cash flow was a bit more than EUR 8 million, but there, net working capital increased by EUR 6 million, especially in December, we made a lot of product deliveries, and that means net sales exceeding our accounts receivables. So that made impact to net working capital and increase that and impacted to our total cash flow numbers as well. Investing activities, the investing cash also a bit more than EUR 8 million and major part. So EUR 7 million of that was actually capitalized R&D investments. And financing activities cash flow was roughly EUR 0.3 million and includes our dividend payments made at the beginning of the year to anyone. And then if we look briefly at our assets and liabilities. The total assets and liabilities is EUR 166 million. And looking at assets first, noncurrent assets are roughly EUR 86 million. So 52% of total assets and roughly half of -- a bit more than half of that EUR 86 million are capitalized development costs, so EUR 48 million. Current assets, EUR 80 million. And about half of that are trade and other receivables, so roughly EUR 40 million. And our inventory value at the end of the last year was roughly EUR 90 million, and cash -- total cash, EUR 22 million. And then on other side of the balance sheet, so equity and liabilities, we see that still our equity ratio is strong, a bit more than 72%. And in liability side, which is totally roughly EUR 50 million. There is interest-bearing debt, EUR 22 million and trade and other payables, EUR 23 million and still net gearing key measure is very good level at 0.2%. So, all in all, our balance sheet is very stable and strong and good shape. So we are good to continue for the current year. So here was briefly our numbers. And the next, Hannu will tell about our outlook for current year. Thank you.

[Hannu Huttunen, CEO & Chairman of Management Group]

Okay. Thanks, Pekka. A few words about the outlook for this current year. As discussed earlier, this disruption of the component availability had a remarkable impact to our numbers already during '21. And when it comes to component situation from our point of view, it seems that situation in the beginning of this year is even worse. So, so far, we've been able to get additional component batches from this so-called spot market. But now also the challenge in the spot market seems to be quite empty and we really don't have a good visibility that how much components we will be able to acquire during the whole year. So from that reason, we -- not like typically, we give guidance or outlook only for the first 6 months of the started '22. And how it looks at the moment is that our sales will be roughly in the same level [ than ] it was during the first half of the previous year, which means that our operational result or profit will be negative from these first 6 months. Okay. I guess that now we have a time slot for the questions or comments. Okay. No questions. So thanks, everybody, for following our presentation. Thank you.