Enea AB

STO:ENEA

Earnings Call Transcript 2019-Q1

[Operator]

Ladies and gentlemen, welcome to the Enea AB Q1 report 2018 (sic) [ 2019 ]. [Operator Instructions] I'll now hand the floor to our first speaker, CEO Anders Lidbeck. Please begin.

[Anders Lidbeck, President & CEO]

Thank you. Good morning, everyone, and thank you for giving me this opportunity to walk you through our Q1 numbers.If we look at the Slide #2 here, we will follow the normal agenda, so I will take you through a short intro to the company, go through the financials and then discuss way forward. We have though a slightly different format this time because with me here I have Jan Häglund, our new CEO to be. He will take over from me in a couple of weeks. And he will walk you through the strategy -- a few slides on the strategy and the way forward. I also have with me our CFO Björn Westberg. He will talk you through our financial position and be ready to take some questions afterwards.If you look at Slide 3, we have a snapshot of our business, and again, we have quarter 1 here, and the reason for that is that you need to take quarter 1 and maybe take revenues x4 at least to come to the full year number that we should expect for 2019. And the reason for that is that we made an acquisition that we closed in March this year. So going forward that acquisition will be part of our business for every month during rest of the year. That's also why we have a bump in the number of employees. It hasn't changed the percentage we spent on R&D. It's 16% within the P&L and then another couple of millions and percentage points that we spent as capitalized R&D and we have on the balance sheet. And we have a significant bump up in the operating margin in Q1, but I will come back to that in a minute.The global presence has also been increased with this acquisition. We now have a development site in Austria, in Croatia. We have sales and management site in Vienna in Austria. And we do also have more people in Germany with a site in Berlin. So these are the 3 main sites for the acquisition we did in March. We do have or this operation also have some entries in the U.S., but we haven't added sites in U.S. We're still -- we've development in Boston with our Global Services operation mainly located around Phoenix and with our sales and management team located in Silicon Valley in Redwood City.I wonder you might have used our software today, so if you have checked your e-mail via your mobile phone or if you have watched a streamed video today, you probably touched Enea's software that has been embedded in the network. So every day, more than 3 billion people are relying on our software and that's a massive number that we're really proud of. Obviously, it's not the 600 people in Enea that makes this success -- only the 600 people in Enea that makes this success possible, it's really due to this phenomenal success of our customers. And when it comes to the telecom infrastructure, it's predominantly Nokia and Ericsson, that's built the infrastructure with our software inside. And when it comes to accelerating video streams and making videos available for the users out there with the operators and here we've named a few of our large operators that we have as customers. But we do have customers also outside the telecom segment. So telecom and datacom for us is roughly 80% of our business, but we do have customers within the automotive segment like Volvo, consumer electronics like Electrolux. So we have customers and business also outside, but the focus of our business is telecoms and datacoms.If we then go into financials and look, first, on the top line at Slide #9, we had record Q1 revenues in 2019. This is the highest Q1 ever on record for Enea. It is also the highest quarterly growth number on record. So we have 41% growth in Q1 over Q1 '18. And this is in part due to currency effect. So if you take away or adjust for currency, we have 30% growth. It's also been through a settlement we had in the quarter with one of our large customers. I'll come to that in a second also. And if you take that away, we had 30% revenue growth excluding the settlement over Q1 '18. So really great quarter from a top line perspective, and I'll come to some of the other reasons for that also later in the presentation.If we go to Slide #12 -- sorry, #11, we've made settlement in the quarter with a large customer and that settlement follows the arbitration award we got a year ago, and that covers the historic royalties payments that we had the issue with -- the issue around. And this settlement marks the end and the full closure of this multiyear discussion. So that number is historic. We take it as revenue in the quarter. It also helps the bottom line, of course. And -- so that -- it's a good settlement, but obviously, it impacts the quarter, and without that, the quarter would have been SEK 20 million less.So then let me move back to Slide #10 and talk about the operating profit. So the operating profit is 87% up over the same period last year. And it's a 130% operating profit, including nonrecurring items. Would we take away the settlement, it would have been a 56% operating profit growth, and it's the highest ever quarterly operating profit. And if you look at the graph on the left side of the slide, you will see the enormous evolution of our profits over the last couple of quarters. Due to this and due to the fact that number of our shares are stable, we also have a significant EPS growth with 128% over the same period last year.So then let's look at Slide #13 and see how that -- the revenue is broken on customers. We've talked about the fact that we have been -- a large portion of our business has been going through a few number of Key Accounts, the group we call Key Accounts here and the group that we call Key Accounts in the report that we have. It used to represent, only 3 years ago, 50% of our total revenues. In Q1, '19, it represents 32% of our total revenue. And then that -- including the -- the SEK 20 million, it's including the business that comes to these Key Accounts from 2 of the last 3 acquisitions. And even with this additional revenues coming from the acquisition, Key Accounts now only represent 32%. Would we've taken away the SEK 20 million and the new March revenues from the latest acquisitions, Key Accounts would only have been 20% of our quarterly revenues. 54% of revenues comes from, what we call, Worldwide Software Sales. And only 3 years ago, that portion represented mere 19% of our total business. So here we have significant growth. Global Services, if you look at the absolute number, it's very stable, but as a percentage of total revenues, it's 14% of our revenues in the quarter. And with this quarter, we now have 19 quarters of year-over-year revenue growth, and 18 of these 19 quarters, we've had year-over-year profit growth as well.If we break revenues on products, it's actually just a coincidence that these numbers look very similar to the numbers on the left slide. And -- so operating system solutions used to represent 58% of our revenues 3 years ago, now represents 31%. If you look at the absolute numbers, you can see that it's stable. It might actually be a slight increase over Q1 '16, but then you should remember that it's, in here, we have the SEK 20 million from the settlement. And without that, obviously, also, the absolute number would be down a bit, and that's the fact of this product group for us that we have a slight decrease of operating system year-over-year, and you should expect that going forward. And that is due to the fact that our biggest customers within this product group are using more and more open-source product. It's nothing new. It's in line with what we have communicated for the last couple of years now.Global Services though is paying, the 14%, we've had some issues over the years in the U.S. with our services business. Now we've had fairly good quarter within the U.S., instead now we have some slowdown in the European operations. But all in all, it's a fairly stable business in absolute numbers. And even if it's 14% of our revenues, it's less than 5% of our profits.The biggest product area for us is Network Solutions. Again, 3 years ago, it represented only 8% of our total business. Now it represents 54%. And what is good about that is, it's not only that it has grown from 8% to 54% of our revenues, but it is the keys of our business where we have the fastest growth. So the product group that is the largest, it's also where we have the fastest growth and that's obviously part of our strategy, but it's an important change in the business that has taken place.With this change, you can also see that our gross margin is increasing because we have a bigger portion of software revenues. Our gross margin is improving and so is our earnings capacity. So when we can create growth with this business model, we actually accelerate earnings, which is also part of the strategy.So that takes me to Slide 14, and we break here revenues on regions. Even if we have 22% growth in Europe, Middle East, and Africa, it is the region where we've had the slowest growth in the quarter. As I said, the Global Services had some slowdowns in Europe and that's mainly due to some structural changes within Rumania, where we have the biggest site for Global Services, actually worldwide. But also the software side, it's growing at a slightly lower rate than the rest of our geographies.Also, in this European number, we have that settlement amount again, so without that, growth would have been a little less as well.If we look at the Americas, the Americas now represent 38% of our total revenues. It increased with 64% in the quarter over the same period last year, that's predominantly related to the acquisition we did March last year of Openwave Mobility. It's not, therefore, all organic because Openwave also closed in March. So we do have 2 extra months in this year with January and February. So we can't use that number as purely organic growth. The acquisition from this year March and some revenues coming from the Americas, but not that much, and we did have a pretty good Global Services business in Q1 this year.In Asia, I've talked about Asia many times, it now represents 11% of our revenues in the quarter. It's a phenomenal 95% year-over-year growth. Again, it's the same story as in the Americas. It's not purely organic because we did only have Openwave -- the Openwave acquisition in March during '18, and we had this for the full 3 months during '19. But you can see that we'll be significantly improving our presence in Asia, and that's part of the strategy. And I said it many times before that going forward, we would like to see a, from this level, significant increase in revenues coming from the Asia geography.That takes us to Slide #15, and I would like to hand over to Björn Westberg, our CFO, to take us -- to take you through our financial position.

[Björn Westberg, Chief Financial Officer]

Thank you, Anders. Start with cash flow. Strong operating profit is the main driver for an operating cash flow of SEK 93 million. Looking on the cash position, about the same as last year Q1, but increased by SEK 68 million compared to the year-end 2018 and that's the reason there as well as the strong operating cash flow. Looking on the interest-bearing liabilities, it's about SEK 100 million high than Q1 and that's mainly due to the payments toward acquisitions, remaining payments for previous acquisitions, but also the payment -- first payment in December for acquisition from Atos.Equity ratio is 49%, and it's higher than Q1 last year and last year was, of course, affected much by the Openwave acquisition, and this is more normal level. So it's a little bit less than year-end 2018, as we had acquisition from Atos affecting that as well this quarter. But overall, we can say, it's a very strong financial position. Thank you.

[Anders Lidbeck, President & CEO]

Thank you for that, Björn. And now, I would like to take the opportunity to introduce and welcome Jan Häglund. Jan Häglund joined us 1st of April, and he is working with me during the month of April and starting May, with the Annual Shareholders Meeting, he will take over as CEO for Enea. So I'm very happy to introduce Jan and let Jan take you through a couple of slides on way forward.

[Jan Häglund]

Thank you, Anders. This is Jan Häglund here. So first of all, let me just say how pleased I am to have the opportunity to sit here. I'm looking forward to working with all of you going forward. So still new in the job, but I'll say a few words here on Enea's position and way forward. So starting with Slide 17. Anders had already covered this. The company right now has an interesting mix of business where 54% is the largest part based on Network Solutions. A sort of traditional business is still there and stands for an important 31% of the business, and then there is Global Services on 14%. Those of you who do the math will see that it's summed up to 99%, so there are a few small things outside of this. But the main business is the Network Solutions, Operating System and Global Services.So if we take the next slide, Slide 18. This shows the journey that Enea has been on them. So with Operating System Solutions, things like protocol stacks, platforms/middleware, operating systems have been serving the real-time sort of demands of our customers during several years. These demands are still there, and this is still a part of our business and will be going forward. However, as you see here, Network Solutions has been added, and this adds not only to the portfolio, but also to the position we have with customers. This new business is partly embedded software into other solutions, other customer solutions, but it's also higher up in the value chain, meaning that Enea now also can provide entire solutions to customers, like operators, for example. Examples of this is traffic management. Traffic management is really about optimizing the traffic. For example, video traffic that goes over mobile broadband networks. I think we've all experienced what a stalling video does and how unhappy you get when a video doesn't perform as you want. This is one of the expertise areas now of Enea that we are working with many, many customers across the world to sell.Another area is traffic classification. This is really about identifying what traffic is going on in the network, and then based on that you can take different decisions. One decision is actually traffic optimization, where you can do whatever it takes them to improve a video stream, for example. Another thing is around cybersecurity, whether classification of malicious traffic can be used to block that traffic. So this gives Enea position also an entry point into cybersecurity. And then, of course, the important area of network virtualization. Big trend in, well, all industries, including telecom, but hardware and software is being separated. And for Enea as a software company, it, of course, paves the way for us to become even more relevant in network software. So on the next slide then bridging on to network virtualization, this is actually the latest addition to our portfolio because the acquisition of parts from the Atos solution company is actually in exactly this space. It's about policy and control applications for network application. It brings Enea into a position where we become even more relevant for 4G and 5G networks, and it complements the software that Enea already had through earlier acquisitions with Openwave and Qosmos.It's Enea higher up in the value chain and makes us relevant, hopefully, not only for today's network, but also for tomorrow's 5G networks where lots of evolution is going on right now across the world.So let's say a few words about 5G now. The Slide 20 summarizes this on a high level. I think we all read about 5G in the newspapers in some geographies like the Americas and also Asia, 5G is now even becoming a reality with the first operator launches. And there are many, many promises and many market developments around 5G. It's, of course, about us as consumers, but things like extreme mobile broadband will help us to consume what needs to be consumed over smartphones, et cetera. It can open up for new areas like real-time gaming. If you have teenage kids who're probably be aware of that gaming today is confined probably to fixed line to a large extent, at least over real-time, 5G can potentially change that due to shorter latencies and more real-time performance. But then as the last icon here to the left indicates, 5G is also about new markets, like industrial markets. For example, factory automation. So what do you mean -- what do you need in the 5G systems? Well, there are many things that will be needed and that are needed to realize the 5G systems. And what this slide illustrates is that Enea is well positioned for number of these key areas: like open user plane, optimized traffic, like shared data layer to take care of all the data system generates to analyze and to configure, like control plane to manage all these different applications and devices in the network, like traffic classification to be able to handle traffic in a smart intelligent way. And of course, operating systems and NOC infrastructure that forms the basis for any kind of real-time performance that is even more important in the 5G systems.So I think, all in all there, I'm looking to all the opportunities we have, both Enea's portfolio as well as the market development driven by 5G will create going forward.So next slide, just happy to note that Enea's portfolio has been recognized in a number of occasions. This slide here summarizes a bit how our latest products have been noticed in various awards. One example is, we got a Gold award for product excellence by Info Security, that was about our cybersecurity offerings based on the Qosmos product suite. And in particular, it was about our virtual probes. And we also won another award for the same product in category for network traffic analysis. And then the last, the third one here is actually about one of our latest product solutions, which is our NFVi platform, so NFV infrastructure, in particular, than the Enea's offering for universal CPE, which is a new offering that helps to sort of facilitate enterprise network, in particular, small and medium enterprises, where Enea has a solution for universal CPE and the management of software for Enea for enterprise networks. So it's just fun to see that external bodies are recognizing the efforts and investment that we do in the business.So just wrap up with the last slide, Anders want to take us through.

[Anders Lidbeck, President & CEO]

So thank you very much, Jan. And again, a big welcome to Enea. It's great to have you here with us.All right. So then the market outlook for 2019, we haven't changed that. It's on budget since the beginning of the year, and our objective is still to achieve revenue growth over 2018, and it is to have an operating margin exceeding 20%.So with that, I would like to say thank you. And we're ready to take any questions.

[Operator]

[Operator Instructions] We have one question coming for you so far that's from the line of Viktor Westman at Redeye.

[Viktor Westman, Analyst]

First, I want to ask about the growth possibilities for the mobile video in Openwave, so to say. Is this primarily to add -- for your customers to add more things from the portfolio?

[Anders Lidbeck, President & CEO]

Right. So thank you, Viktor. The growth strategy within the traffic management product portfolio -- product area is to, what we call -- said before, land and expand. So we want to win a site within often very distributed large operator. They have obviously a corporate head office -- quarters, but then they have operations in different geographies. And so to win in one of these geographies, and then to make that successful, prove that we can accelerate video traffic and that we can do that without increase in infrastructure investment. And then, with that proof point move to other geographies within the same operator. So that's one area of growth within this product space.The other one is to -- when we have installed our traffic management solution increase the number of data that goes through that traffic management solutions, so that we can charge more, higher price for that product within that geography. So those are the 2 main vectors of growth.Third one is, what was said before on the earlier slide is, we tried to say the shared data layers, which is a new investment area for us and we want to try to doing business on that product also within the operators going forward.

[Viktor Westman, Analyst]

Okay. Great. And one more from me. On the -- for the recurring revenues, can you say something what that looks like for -- especially for Qosmos, whether there has been some change and also for the new acquisition from Atos? What's the -- I mean, what's the proportions of recurring revenue, we're talking 10%, 20%, a year's rough numbers, if you may?

[Anders Lidbeck, President & CEO]

Yes. So the new acquisitions, they are just acquisition from the Atos group. Here we have a traditional software model where it's with perpetual licenses and then support and maintenance, but it's a business that's been around for a very long time. It comes willingly out of the Siemens Group. And -- so there is a significant portion of support and maintenance in that revenue. And we don't give the exact numbers here, but it's 40% of total revenue that is support and maintenance. It exceeds 40%. When it comes to the ixEngine product line and the probe, we have now -- have that within the portfolio for a bit more than 2 years, and we're starting to see a result of our -- us trying to move towards turn-based licenses. We also see quite success -- number of successes in the back end of this business. So the recurring revenues, if you include the royalties for the back end loaded revenue streams that, for sure, not secure. They vary a bit, but still they come to you, at you from a [ close end ]. It's also north of 40% recurring revenues. I would say north of 50% coming -- moving to the extended product line.

[Operator]

[Operator Instructions] There seems to be no further questions at this point. So I'll hand back to our speakers for the closing comments.

[Anders Lidbeck, President & CEO]

Right. Thank you very much, and thank you very much for this opportunity. I'll change the wording in my next sentence, I will not see you after our Q2 numbers. Instead, I would also like to thank you all and everyone for giving me this opportunity over the last couple of years and looking forward from another position to follow the ambition of Enea. So thank you very much, and goodbye.

[Björn Westberg, Chief Financial Officer]

Thank you.