Enea AB
STO:ENEA

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Enea AB
STO:ENEA
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Price: 101.8 SEK -3.05%
Market Cap: 2.1B SEK
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Earnings Call Transcript

Earnings Call Transcript
2018-Q1

from 0
Operator

Ladies and gentlemen, welcome to the Enea Q1 report 2018. Today, I am pleased to present CEO, Anders Lidbeck. [Operator Instructions]Speaker, please begin your meeting.

A
Anders Lidbeck
President & CEO

Thank you. Good morning, everyone, and thank you for this opportunity to walk you through our Q1 numbers. I will follow the agenda as always. A short intro to Enea, then looking into the financials and then discuss the way forward and look at the outlook for the rest of the year.So if I move through the intro and then move to Slide 4. Last year, Enea, we did a little shy of SEK 600 million in revenues with 463 employees. We have an operating margin of 23%, and we reinvested 17% of our revenues into R&D.Our vision is to help you develop amazing functions in the connected society. And you, being telecom equipment manufacturers, telco operators and also other companies working in today's connected society. The mission we have is to take -- is to have a platform ready for you that you can work on. And the commitment we have is to work together with the leading hardware vendors in the open-source community. To harden both today's and tomorrow's solutions. Open-source is more and more important to us, and we invest a fair share of our R&D in open-source projects.More than 3 billion people rely on our software every day to connect to the Internet or to make a mobile phone call. Some of you on this call today might actually rely on our software to make it happen. And the reason for that is that our 2 large customers, Nokia and Ericsson has more than 50% of the world's telecom infrastructure or mobile broadband, and in many of their products, we have our software. But we also have other leading customers, like Volvo in Volvo trucks, there are our software. In Electrolux vacuum cleaners, we have our software. With Motorola, Honeywell, Yamaha, Hytera, in all these companies you can find our software inside their products.With the recent acquisition of Openwave Mobility, we're adding a significant list of leading customers to our customer base. And the difference with this is that here we have our software with the end-user. So it's not embedded in someone else's product, but it's embedded in the core software deployment of these large telco operators.That takes us into the financials, and that also takes me into the first slide, where I would like to just to present the acquisition of Openwave and how it impacts our Q1 numbers. So we acquired this -- we closed the acquisition March 15. And we are consolidating the numbers as of March 2018. We paid with cash at hand and as 5 -- on a 3-year, SEK 500 million unsecured bonds. The consideration was SEK 748.5 million. And the interest on the bond is 5.25% above [indiscernible] board, with a floor of 0% percent, so the interest cannot go below 5.25%. And part of that interest has obviously impacted our financial net in Q1.We also had acquisition-related expense -- expenses of SEK 8 million as we have as part of our nonrecurring costs, and those are impacting EPS, obviously. Roughly, or approximately 12% of the purchase price is allocated to net identifiable assets, which gives an amortization of SEK 10 million per year. These are preliminary numbers, because they will be open for 12 months. But these are the numbers that we have today and we have them from our accounting advisors.The pro forma revenues of Openwave for Q1 was SEK 68 million with an EBIT of SEK 8 million. Going forward, we're going into the Enea family, Openwave will not be reported separately. Instead, costs will be part of the cost structure of the company, and revenues will be reported as part of our network solutions product group.All in all, as we said when we presented this acquisition before, we think that the acquisition will be accretive on EPS. Already this year, even though given the acquisition-related expenses of SEK 8 million in Q1, it's not accretive on EPS in Q1. And also remember that we also only consolidated when March numbers in Q1. One should though remember also that due to variations within the quarter, the last months of Q1 is better than the first months from an, from -- especially from an EBIT perspective. But, again, I said, these numbers will not be reported separately going forward as our last acquisitions, and as we have the plan for integration. We're integrating these companies and they will be part of the products group and product families we have in the company.So from an operating profit perspective, on Slide 11, this is a record quarter. We have a 28% operating profit increase year-over-year, excluding nonrecurring costs. The operating profit in the quarter was SEK 35 million. If we take away the transaction costs or if we include the transaction costs, we have an operating profit of 27% -- SEK 27 million, which is also an increase even with the transaction cost over Q1 2017 when we had SEK 25 million.The margin is above 20%. And then one should remember that the company we acquired operated on a 10% margin last year. And even if March will [indiscernible] from an -- from a margin perspective, this is really a satisfying margin. If we compare that with the last year, we had 19%, so it's better than last year. And if we add back the transaction cost, we have an operating margin of 16%.This is the highest operating profit in a first quarter ever. And if we look at the graph on the right-hand side of this slide, you'll also see very interesting path and forming again, with -- in Q1 that is slightly down over Q4, but at this time, significantly up on all Q1 last year.If we move to revenues. We've had the 15th consecutive quarter of revenue growth. The revenue growth in the quarter, in Swedish money is 19%. If we adjust for currency, our growth is above 20%. And this is, it should be compared also with last year and it's better growth than last year. This is the highest quarterly revenue ever in the Enea we know today, and not, I mean, since the divestment of our Nordic consulting business that we did in 2011.The revenue growth, if I break that on geographies, on Slide 13, we have in here, as I said before, we've added in the March revenues of Openwave. And with that, we have a significant increase in the U.S. or in Americas. So with Openwave, we have 58% growth in the Americas business. But we also have growth in our worldwide software sales operation below the Openwave addition.Also Global Services in Americas is picking up. Global Services is actually picking up also in Europe. And in Europe, that we have renamed because Openwave have quite a lot of operation also in Middle East and Africa. We also have revenue growth. And in Asia, we have good growth, both from the Worldwide Software Sales operation as well as from Openwave Mobility. And you see now that the pattern is not significantly different with the Openwave acquisition. We still have the majority of our business in EMEA with a significant portion coming from the Americas. But still, this proportion had shown Asia and going forward, obviously, we hope to see that our Asia operation will grow faster than the rest, but that will only happen over time. It's not something that will happen overnight.A bigger shift in our product, in the revenue mix is happening when we break it on products. This is very important on parts of our strategic direction. And that direction is to lessen the dependency on one product group. So now with the acquisition of Qosmos that we did December 2016, and with Openwave now March 2018. The largest product group in EMEA is actually Network Solutions, representing 39% of our revenues in Q1. And it's also the fastest-growing product. And that's, I think, an important note here, that the fastest -- the largest product group is growing the fastest.Operating system, that used to be the biggest group and that has been the biggest product group for the last 25 years or so. There we have a stable business, a very profitable business. But it's slightly down over last year, and that is due to the open-source trends, not only in Key Accounts, but also within the industry.Global Services, it represents 22%. Here we have really good quarter, with both quarter-on-quarter growth, i.e., sequential growth and year-over-year growth.If I go into Global Services, I say we have growth in the high teens. It has been, especially beginning of 2017 and end of 2016, we have had some issues, with some top line issues within Global Services. It doesn't represent a big portion of our profits, but it is 22% of our revenues, and therefore, deserves some minutes of discussion.We have had issues in the U.S. But in the U.S. now, in Q1 we're back to growth. We've won a number of new customers, which is very satisfying. And all during these years, we've been had -- some trouble on the combined Global Services. We have had the good development in the European operation, and so as well in Q1, where the European Global Services operation, again, posts solid year-over-year growth months.A similar percentage, a small part of our profits is below 5% of our profits, but a good top line development for our Global Services business. And also important to note is that the bridge services offering, where we win the business predominantly in the U.S. but now also, we have established an operation in Sweden. We deliver the services out of our Romania operation, it's growing, and that's important for the bottom line of the Global Services business.If you look at our financial position on Slide 16, it's obvious that we now have a SEK 500 million bond on the balance sheet. So the total interest-bearing liability is up from SEK 133 million to SEK 588.9 million. And this is also impacting the financial net. The financial net is also impacted by translation costs because of currency differences. So this is not only interest in the financial net. And this also takes us to a net debt position of SEK 558 million, which is different to 1 year ago, where we had the net cash position of SEK 50 million. We still have an equity ratio of 43.7%. But this is a new situation for Enea. And we have some leverage now in the business which is, affects that -- new for us.The cash position at the end of Q1 is SEK 140 million. And the cash flow from operations is SEK 8 million compared to SEK 30 million last year. But that is mainly due to big accounts receivable that was paid April 3 instead of March 30, as it should have been, except the customer with control of the payment terms. But all in all, a different financial position. But with a good cash position at the end of the quarter. And with a new significant acquisition in the hands of the shareholders of Enea.So this takes us to some minutes on way forward and outlook. And if I go to Slide 18, there's a lot of things that had happened in the industry during Q1. And this is just a snapshot of the important things. And the first thing that happened was -- or the first thing of this snapshots that happened was that AT&T open-sourced its network operating system. Later, it was announced that Intel would open-source its Titanium Cloud software. That's the Wind River software product. And then, a few days later, Wind River was announced to be acquired, so sold from Intel, and acquired by TPG. Then Microsoft, beginning of April announced that they would launch an RTOS, an operating system, real-time operating system. So now, both Amazon and Microsoft have their own real-time operating systems. And this -- the open-source trend and the trend that more and more people will have integrated network operating systems and bigger companies will have their own RTOSes. It's pushing Enea to develop. And this is, obviously not something that happened in Q1. It's just an example of -- that things are continuously happening in this industry.So our strategic path or strategic evolution on Slide 19 is to move up in the software side, and to move up in the value chain and to create a complete software solution rather than having software as an OEM component to people building boxes.Our ambition is also to reduce dependency on single product or single customers. And therefore, expand our portfolio and expand our addressable market. And clearly, we also want to move closer to the end-user, and we do think that size matters, so the closer we come to the end-users and the more dependent the end-user becomes on us as a company, the stronger we need to be as a company. And therefore, we will also prioritize growth before margin expansion. You will see later that we clearly prioritize profit expansion, but not necessarily margin expansion. And this is the strategic path that we've had now for a couple of years, and we should see the Qosmos acquisition in the light of this. And you should see the Openwave acquisition in the light of this strategic evolution.A really important change in our revenue mix has happened in the last 4 years. And this is -- can be connected to the point before of risk-reduced dependency on single product and customers. So 4 years ago, 57% of our revenues came from our Key Accounts. Now in Q1 '18, only 34% comes from our Key Accounts. And we see this significant increase in what we call Worldwide Software Sales, both from the acquisition and from organic growth. And it today, it represents 43% of the revenues. Four years ago, it only represented 15%.And a large proportion of the sale to the Key Accounts comes from one product line. And if I move into Slide 21, that product line was the operating systems that 4 years ago represented much more than 65% of our revenues. It's now down to 38%. It's a very important product area for us. We will constantly renew customers in that every year. We're in the 5G infrastructure. We're in new systems being built. But due to the pressure from open-source and due to the launch of new, small nimble operating systems, we don't see growth in this area. And therefore, we don't want to be dependent on this area.Instead, what we have now is a new offering built from acquisition and our own product development, now representing 39% of our revenues in Q1 2018. Here we have growth. We still have a lot of competition. Here is where you will find the competition from Titanium, here's where you will find to some extent competition from the AT&T dNOS and make it slightly different. But there's always a competition in this area. But we have very competitive offering, and we are moving up the software stack, closer to the customer, to the end customer, and this is also where you find the Openwave is. And our Global Services, our expert services, representing 20% of our revenues. It can vary between the low 20s and the high 20% of our revenues. But it's an important part of the ability Enea has to deliver successive projects.Most of you who are at Mobile World Congress will also have been -- what we demoed there, we have 7 demo booths actually demoing real solutions on real hardware. We have our universal CPE, our virtual CPE solution, working both on the Intel hardware and on ARM hardware. We have, you can say, a first version, synergistic product development of the Qosmos classifier, which is enabling dynamic service function chaining, and it's built on the Qosmos IX engine product that we acquired in December 2016. And this is how we think. We think that the acquisition that we're doing should complement the organic growth, or should complement the organic development of the company, should find new areas to take our products, and should find new areas for us as the company to grow with.With these acquisitions, there will -- are not necessarily always when they do them, operating on the same type of margins as we have been used to Enea doing. And that is also important to remember, that's only Enea the last 8 years. Before that, Enea operated on much lower margin. But since the change in 2011, we have been used to Enea operating on the top 20% operating markets.The companies acquired are not necessarily doing that, but we are evolving the companies, protecting their businesses, but gradually also improving the operating margin. We've done that with IP Devel, that the Romanian services operation's been with us since 2007, been very important for us and all the key management team is still with us.The Qosmos acquisition we did in December, significant acquisitions, really important for us, the largest acquisition at the time. The entire management team is also with us, and doing great jobs [ and ] contribution within Enea. Product is great, we're winning a lot of new customers.And now Openwave, which is yet again the biggest acquisition, and they've only been with us from March 15. So we've only been a shareholder from March 15th. But we clearly hope to see the same -- we'll be able to say the same thing with -- about Openwave in 1-year time.Openwave takes us closer to the customer. It actually takes us to the end-user, to the operators. We've moved up the value chain with the acquisition of Openwave Mobility. We're the proud shareholders of a software suite that has been awarded a lot of prizes, that is the leading industry platform in its field. That helps both subscriber, or cloud, the data management versus [indiscernible] data management. And that helps operators to manage and monetize encrypted and unencrypted traffic and specialize in video traffic. So a very well-positioned company and a very welcome addition to Enea portfolio.I want to say beyond that, for us, it's not about synergies to begin with. For us, it's about acquiring strong companies that are strong on a standalone basis. And what we want to do is, we want to be an even better shareholder for these companies, that will create the opportunities for these companies to continue to grow and continue to develop. And that is the same here. We want to make sure that Openwave can continue on the path that they are on and can continue to grow their top line and improve their bottom line.And with that, we are also telling our own organization that also -- the existing organization need to focus on the path they are on, as to grow the revenues in that space and improve margins and talk it in that space.Only after we can secure that one space one, and the other one will stay for one, only after that we're trying to create synergies going forward. So for us, that would mean going into the next couple of years. Here, we're focusing all the apps.So the market outlook for 2018, it's slightly changed. In essence, it's the same. So our [indiscernible] for the full year in 2018 is to achieve revenue growth and improve operating profits compared to 2017. Before we had the sentence that we think that this will happen at the second half of the year, we've taken that sentence out, and we just say that our objective for the full year is to achieve revenue growth and improve operating margin.So with that, I would like to say thank you, and open up for questions.

Operator

[Operator Instructions] And we do have a question from the line of Viktor Westman from Redeye.

V
Viktor Westman
Analyst

Anders, I am -- two questions here. First, if you can say something about approximately how large the telecom operator revenue segment was last year? And second, if you can give an update on the security sales there. Is there any specific reason that caused a decline?

A
Anders Lidbeck
President & CEO

So I could give you that number, if you would give me some more time to begin [ rate ]. But last year, that historical didn't measure operating -- the revenue to the operators. Specifically, it was part of the telecom segment at large. We have some operator business, especially within our Global Services operation. So it was little, and from a software perspective, it was close to 0, but we had some services business with operators a year ago. When it comes to security, I wouldn't say that, that business is down. Instead, I would say, at the position in that space it continues to be up. If you're looking at a percentage of total, that percentage is down, but that is then mainly because the rest is up.

V
Viktor Westman
Analyst

Okay. One last question here. So I'm a bit curious about your strategy to move up the value chain. When you say you want to get closer to the end customers, are you referring to sales? Or do you mean that do would use their input to make your solutions better?

A
Anders Lidbeck
President & CEO

Well, I am definitely referring to sales. But as a consequence of working with the end-users, we also hope to get their feedback on how we can develop our product better and faster so that we then meet the expectation of other customers, when we're selling them as part of someone else's telecom equipment. So I'm definitely referring to sales.

Operator

[Operator Instructions] And there are currently no further questions registered. So I'll hand the call back to you, speaker. Please, go ahead.

A
Anders Lidbeck
President & CEO

All right. Thank you very much, and thank you very much for this opportunity. And hope to talk to you, again, in 3 months, if not before. Thank you very much and goodbye.

Operator

And this now concludes the conference call. Thank you all for attending. You may now disconnect your line.