Enea AB
STO:ENEA

Watchlist Manager
Enea AB Logo
Enea AB
STO:ENEA
Watchlist
Price: 101.6 SEK -0.2%
Market Cap: 2.1B SEK
Have any thoughts about
Enea AB?
Write Note

Earnings Call Transcript

Earnings Call Transcript
2022-Q1

from 0
Operator

Welcome to the Enea Interim Report for the First Quarter of 2022. [Operator Instructions]

Today, I'm pleased to present CEO, Jan Haglund; and CFO, Ola Burmark. Speakers, please begin.

J
Jan Häglund
executive

Thank you very much. This is Jan Haglund, CEO of Enea, and I will be joined in this call by Ola Burmark, our CFO. We're here to present and summarize the results of the first quarter of 2022. We will highlight some of the news, the key events in the quarter and be at the end, summarizing our view on the way forward and the market outlook.

On Page 3, we summarize the key financial details. Our net sales in the quarter amounted to SEK 242 million, which is an 8% increase in comparable currencies on the year before, driven mainly by our acquisition of AdaptiveMobile Security, a specialist company in cybersecurity for telecoms. Our operating margin was 8.4%, excluding non-recurring items. This is below our profitability -- long-term profitability target, mainly caused by changes in seasonality in sales, and it's also called for continued cost control, especially in an uncertain macro environment, with fluctuations in currency and pressure on inflation.

Our net debt amounted to SEK 554 million, mainly changing by currency, but it's also notable that we have -- we are getting a new financing structure in place, which is more long term and gives us more flexibility. The corresponding key value net debt-to-EBITDA is 1.64 at the end of the quarter. Our earnings per share was slightly negative, SEK 0.38. Notable here is that the efficiency program that we have implemented during the first quarter, cost SEK 23 million, that had an impact on earnings per share, and the full effect of that restructuring will be seen from April.

Our cash flow was also a weak SEK 4 million in the quarter, impacted by the lower operating profit and also by an increase in delayed customer payments. However, we have a positive outlook on the market and the opportunities. We see a big interest in our portfolio for 5G and cybersecurity and we continue the investments in these areas noted here by a share of R&D to sales of about 30%.

On the next page, summarizing a few key events in the market for EMEA. AdaptiveMobile Security, as mentioned, contributed to a growth of 8%, and it's notable then, that AdaptiveMobile Security follows our plan from the acquisition and actually grew by double-digit amount compared to the same quarter, preacquisition. We see heightened attention on mobile network security due to the Ukraine conflict. There is no doubt about that, and we estimate that operators and nations will have to invest more in this going forward.

We had a relatively weak development in our Network Solutions segment and minus 4%, and that has impacted our growth. However, we did close a new 5G and WiFi contract with a lead North American operator, also demonstrating some of the cross-selling synergies between companies that we previously have acquired, and that previously have been operating as independent entities.

Mobile World Congress was a highlight during the quarter, not just for the fact of meeting another 60,000 colleagues in mobile industry, but also a return to physical customer meetings. Something that we believe is positive for new sales. As mentioned before, we continue investments in sales and product development for cybersecurity and 5G, and we had implemented cost reductions and restructuring during the first quarter, to be fully realized in the second quarter. And then also, as mentioned before, currency and inflationary effects, they require continued strong cost control, something that we have done in the past and will continue to do in the future.

On Page 5, mentioning a bit of the changing macro environment and in particular, the threats on cybersecurity and telecom, that this entails. We, already before the conflict and war in Ukraine, published a whitepaper on how mobile networks,[ both ] will be target, but in fact, referenced also in these kind of hybrid conflicts. And unfortunately, we see a lot of that coming to play. We see evidence of hacking. We see evidence of information in mobile network being used, in fact as part of the military operations. We have solutions, and we are working with customers across the world, in order to prevent and protect against these kind of cybersecurity threats in telecom. We believe that we both have products and expertise, in order to be relevant in this market going forward.

One proof of that on Page 6, was the fact that we, during the Mobile World Congress of 2022, actually won a very prestigious prize. We won the Global Mobile Awards price for the World's First Unified 5G Network Security Solution. We're very pleased with that, and gives us confidence to continue to invest in this important growth area.

On Page 7, we summarize one of our key deals in the quarter. We published early April, a contract that was closed in March with a leading North American operator, a contract for 5G and WiFi, in total worth USD 5.1 million. It's a 3-year agreement, where we get the confidence to provide both WiFi services, as well as [ increases in ] applications in this operator's 5G standalone core network. And we're very happy with this. We're, of course, happy with the continued relation with this existing customer, but while we broadened the relation, and we're happy with the fact that we have synergies on different parts of the company, that led to this important deal for us. It also -- the deal had an impact financially a positive impact on the first quarter of USD 2.8 million, which then is the license piece of a larger deal, which also entails professional services and support and maintenance.

Another key event in the quarter summarized on Page 8 is the decision and the agreement to divest Enea Software Development Services business. As many of you may know, we have this operation in Enea since many years. It has been a successful part of the company. But it is a standalone piece of the company that is unrelated to the major part of the company, which is software product development. And therefore, we decided that this part of our business would do better as part of another company.

And here, we have -- and acquired AROBS, a Romanian listed company, which specializes in software development services, that has a broader customer base and also a broader base of expertise. And we believe then that, that is a positive transaction, both for customers as well as for employees. On the financial transaction details, it's worth noting then that this deal has been signed but not closed. We estimate that closing will happen during the second quarter. And on closing them, the payment will be done in cash, based on an enterprise value of EUR 17.9 million, that will also be a positive effect on the net result of Enea, corresponding to an estimated SEK 115 million on closing.

The financial effect going forward on Enea will, of course, see that some revenue from this operation disappears and goes away. The same thing with a bottom line contribution. However, to be noted that, the gross margin effect of it will be positive on our company, since we become even more [ specialized ] on software products for telecom and cybersecurity.

With that, I will leave it over to Ola Burmark, to take us through a few details on the financial results. Go ahead Ola.

O
Ola Burmark
executive

Thank you. We ended the quarter with the SEK 242 million in net sales compared to SEK 214 million for the first quarter last year. This is a growth of 13% and the growth is really based in currency adjusted growth, so we had tailwind due to strong U.S. dollars and euros. And we did also have the acquisition of Adaptive, that was not part of the Group in the first quarter last year, that contributed with almost SEK 34 million in net sales during the quarter. So currency adjusted organic growth, excluding then the currency impact and the acquisition of AdaptiveMobile Security, the organic growth rate was negative by 7.1%, which is expected, as the operating systems business continues to decline, but we did also, as Jan said initially, had a weak quarter in our Network Solutions business.

Next slide, please. Network Solutions is basically the business that we are running now. The software development services are likely to be divested during this quarter, as said, so the lion's part is now Network Solutions. And yes, this is now 73% of our total turnover, it has been growing steadily as part of the portfolio over the past 4 years. And -- sorry, today, this quarter grew 25%, of course, driven by the acquisitions. But this is the area we definitely -- where we seek acquisitions, and where we spend our development resources in terms of new products and strengthen the portfolio.

Next slide, please. EBITDA was 25.8%, excluding nonrecurring items in the first quarter. It is lower than the same quarter last year, where we had SEK 75 million, and this is mainly driven by the weaker sales in the quarter. In terms of gross margin, we had gross margin of almost 74% compared to 79% for the same quarter last year, and the main explanation for this, is that the acquisition of AdaptiveMobile Security has, I would say, a stronger service offering than the other part of Enea. So the gross profit that they contributed or gross margin, they contributed, has a lower percentage. But that service offering is, of course, very attractive to the secured market.

Next slide, please. If you look at EBIT, we reached 8.4% or SEK 20 million, excluding non-recurring items in the quarter, which is substantially lower than same quarter last year. Here again, very much driven by the weak sales and then the slightly lower gross margin. Excluding non-recurring items, EBIT was actually negative by SEK 3.5 million or 1.5%, resulting in an earnings per share for the quarter, a negative of SEK 0.38.

I think it's worth mentioning that we have also a negative impact in terms of unfavorable FX when it comes to cost. We have a positive impact when it comes to revenue, but a negative impact on costs. And comparing our OpEx versus last year, we don't see we have an OpEx increase in fixed currencies. So we do definitely have cost control, but we will still need to monitor this closely, in order to make sure that our costs are balanced.

Next, please. If we look at our financial position, we delivered cash flow in the quarter, operational cash flow of SEK 3.8 million, which, of course, very much is driven by the low profit in the quarter. And we do also see some increase in working capital, which is temporary, mainly due to the fact we see customer payment delays over the quarter. We have, during March, signed -- during April, sorry, signed a new financing structure. So we will -- here during the quarter, refinancing our current debt and instead of having a loan portfolio, which is amortizing, we will have fixed term loan in euros, which is replacing the current one and a revolver facility of SEK 350 million. In terms of equity ratio, we are just around 60% versus 65% last year, and net debt-to-EBITDA is SEK 164 million.

Thank you. I hand over to Jan again.

J
Jan Häglund
executive

Thank you, Ola. So let's just, towards the end here, summarize -- summarizing our strategy on Page 16. Our strategy remains focusing on software, focusing on building a high-margin portfolio, in a world where many of our competitors are encumbered by legacy hardware business. We focus on high growth and interesting markets, with an increase compared with last year in cybersecurity and cybersecurity offerings, and cybersecurity expertise, an area which is more relevant than ever.

We continue to invest in 5G core networks, where despite the delay, recent years on that market, we still have an outlook of operator investments in these areas, in years to come. And we see also the Internet of Things being a complementary area, as more and more devices get connected. We have global presence, where we're able to reach many markets and many key operators across the world, thanks to a combination of direct and indirect go-to-market capabilities and the distributed R&D in key markets.

On the last page, Page 17, our outlook for 2022, our long-term target of sales growth and an operating profit above 20%, that remains. But we do see, as everyone, an uncertain macro environment, and the fact that our first quarter is weak, means that we now judge it challenging to reach the profitability target during 2022.

With that, I thank you for listening and hand it back to the moderator, should there be any questions.

Operator

[Operator Instructions] The first question we've received is from Jesper Von Koch, Redeye.

J
Jesper Henrikson
analyst

All right. So let's start with Network Solutions there. Once again, showed a bit poor organic growth, and also the margin. But -- so if we could just get into this, you name seasonality as one effect like H1 being weaker than H2. But could you just elaborate on the underlying reality of this? And also, what products within Network Solutions have had like negative growth during the last few quarters?

J
Jan Häglund
executive

Okay. Thank you, Jesper. Well, I think in the report, we mentioned a few effects here. First, as you mentioned here, the seasonality. We can just look at our historic performance, which has had a seasonality between quarters, meaning that the business traditionally has been back-end heavy. That also goes for our acquired business, that in mobile security, you can see that, for example, in last year, where the total outlook for the year that we published on acquisition, then -- and compare that with the second half, also indicating a back-end heavy profile of the business.

Then we also have some additional points here. We are working on large data management projects and customer contract, that was all well known, that we have published before. And also there, we expect this year then to yield revenues during the remaining part of the year, due to how the contractual delivery milestones are formulated. But also to be mentioned, underlying of the weak organic growth of Network Solutions is the fact that we are still affected by recent years, the pandemic year's hindrance to new sales, hindrance to coming out meeting customers, and the fact that the 5G market, I think, as noted by most people in the market, in particular then, the 5G core market, which comes later than the radio market, has been delayed for various reasons. So I think all in all, those are different effects and where we -- which also then means that, we still have a positive outlook on the market going forward.

J
Jesper Henrikson
analyst

Okay. Good. And as you said and as you've announced -- previously announced quite a big 5G order of USD 5.1 million, could you elaborate on what you see happening on the market [ last year ]? Is it loosening up? And what could we expect going forward?

J
Jan Häglund
executive

Well, as mentioned, the 5G market will happen and is happening, and we see already that more and more networks are built out from a radio perspective, to have 5G capabilities. More and more mobiles. In fact, I think if you look into Apple's statement, they had some news during the last week, and more and more of their sales are also 5G-enabled mobile. So all those are important enablers for a growing market.

Then traditionally then, in the cycle for telecom industry, with the different keys, it takes time until you upgrade the central parts of the brain of the network, which in fact, is then the market that we address, the 5G core network. The 5G core network is a new architecture, which is more built on sort of IT technology, more forward-looking, more future proof in particular towards cloud deployment. But things take time, and during the pandemic, this has not been the priority of all operators, albeit a few. And I think the message here is that, our contract is a proof point, that it is a customer that is investing into a 5G core network, and we're really happy to be part of that deployment. We'll be happy to get the confidence, to provide a solution that is a critical part of that future infrastructure. And I think it's safe to say that going forward, more and more operators will invest into 5G core networks. And then our target [ from that ] is, of course, to be part of that and to take market share.

J
Jesper Henrikson
analyst

All right. And so going into the divestment of the Software Development Services. Maybe a question for Ola, what will the OpEx effect be there?

O
Ola Burmark
executive

Sorry, can you repeat that Jesper?

J
Jesper Henrikson
analyst

Of Software Development Services being divested?

O
Ola Burmark
executive

Yes, wow, they contributed with approximately SEK 130 million in sales 2021, and [ returned ] SEK 20 million in profit. They do have a gross profit around 30% in that business. So please do the math.

Operator

The next question is from Simon Granath, ABG.

S
Simon Granath
analyst

I'd like to go back to the weakness in Network Solutions. Could you comment or make any specific comment, on which products that are currently underperforming, or is it a softness all across the board?

J
Jan Häglund
executive

Well, I mean we have several products in Network Solutions, and although we have a piece of the business which is recurring, there is also a significant piece, which is CapEx, based where we -- due to the business models with operators -- depending on winning new contracts. That also means that there are and have been fluctuations between quarters. And this quarter is an example. And for example, the win we had with a North American operator, is example of the lumpiness and a win here. So I don't think it's any particular part of the business we will see lumpiness and variations in quarters on different pieces, for example, referring to our traffic intelligence, referring to our Policy and Access Control solutions, referring to our data management solutions.

Overall, though, I think you can say that the delayed part of the business is very much related to the new investments. In particular, as mentioned, the 5G market, where we have a portfolio, we continue to invest. But while the market has not picked up as we anticipated a few years ago, probably partly due to the pandemic effect, with different and changing priorities, investment priorities among the operators. But I think we will never know what the market would have been, without the pandemic.

But I think the fact remains, as I mentioned before that, we still have a positive outlook, 5G is happening and the upgrade of the central parts of the network is due to happen, and we already see the leading operators taking these steps, and that's why we're very pleased to be part of that build-out, already before with some of the major data management contracts that we already closed during 2020, and with new contracts then that we have closed recently also in the quarter.

S
Simon Granath
analyst

Thank you for elaborating on that question. And apologies in advance if you're now forced to repeat yourself, but the weakness in Network Solutions, how much would you say is market related, and how much would you say is company specifically related?

J
Jan Häglund
executive

Well, that's very difficult to judge. But I think we can put them in 2 buckets, market related would be the 5G core networks and the position for a small company like Enea, to win a new customer, which has been difficult, of course, with hindrance in new sales, but something where we see the marketing opening up, for example, then with travel restrictions, etcetera, going away. So I think that's more a market effect. If we look at more company specific effects in the report, we mentioned some of our bigger contracts around data management, where we recognize revenue according to delivery milestones. And here, we do expect that some of those delivery milestones are -- will be passed during the remaining part of the year, which then will contribute positively to our Network Solutions product group.

S
Simon Granath
analyst

Okay. And have you made or do you expect to make any profitability enhanced measures in Network Solutions, as a result of the recent progression in that business area?

J
Jan Häglund
executive

We have, as you know, launched a restructuring program during the first quarter, that has been implemented and executed on plan, where we're also taking costs in the first quarter. Some of that, we see an impact of, but the full impact will be from the second quarter, that partly affects Network Solutions, in particular, with the closure of our small-scale virtualization offering, which we judge to be not viable, given the market development during recent years. When it comes to the overall direction for the remaining part of 5G and cybersecurity, we stay on course. Of course, we do it with careful prioritization, with careful judgment on how and where we invest in development resources. We have a pretty favorable cost structure, when it comes to development resources. But all in all, we have a positive outlook, and we'll continue to invest in R&D for future business in that area.

S
Simon Granath
analyst

Perfect. And you mentioned in -- during the presentation, a 20% growth for AdaptiveMobile year-on-year, which is certainly a good number? And how should we think around this business unit going forward? And here, I presume that there should be a lag until recent geopolitical events translate into orders that you recently mentioned?

J
Jan Häglund
executive

I think I mentioned double-digit growth, Simon, relative to corresponding quarter last year. So -- and we're happy about the acquisition of AdaptiveMobile Security. We did the acquisition mid last year, based on the general direction, where we already have a starting point in cybersecurity, we see a growing market, and we see that -- the sweet spot or niche for cybersecurity in telecoms is an underserved area, where we believed already then, that investments will have to increase, based on the criticality of telecom networks already today, but even more in the future, when more and more of our society becomes connected.

Now with the Ukrainian war and some of the geopolitical tensions, I think we have reported almost every day about increasing threats and how networks, as well as information spreading is part of a hybrid warfare development visible in some cases, but also, unfortunately, invisible to manage. So all in all, that's why we are happy about the acquisition. We see that the double-digit growth here is evidence of this. And even more evidence then, is the fact that we have a number of important discussions with potential customers and we're also rewarded wins for our portfolio. You will also see us being quoted in some of the major media, including Wall Street Journal during the first quarter.

So we're happy about the acquisition and take a long-term view on this. There is, as Ola mentioned, an effect on the gross margin here, because this is not just a product, but it's also expertise. Cyber security expertise is hard to come about, and we're happy to have that as part of our offering, and we regard that as a differentiator going forward. Short term, the costs, [ it will ] have an impact on profitability of the company, but we do this because we believe in a growing market in the years to come.

S
Simon Granath
analyst

Certainly an exciting business area for you going forward. As a final question from me, before I hand the word back to other listeners, could you make any comments on the specific timing for the divestment of the Services business, when in Q2, should we expect this to incur?

J
Jan Häglund
executive

So there are a few closing conditions that need to be sorted out, and we have given the guidance that this will happen during the second quarter. At this time, I cannot be more specific than that.

S
Simon Granath
analyst

Okay. That's fair.

Operator

The next question is from Frank Maao, DNB Markets.

F
Frank Maaø
analyst

So okay. My first question is regarding the full year profit warning that you basically are issuing today regarding the margins for the full year, which are also top line driven in [ your commentary ]. So this seems perhaps a bit of a slight change of wording and so on, but this is actually quite material, compared to consensus and certainly our estimates. So could you please elaborate a little bit on how you see this developing and how much lower than 20%, you're actually guiding for now, given this and given the fact that the expectations in the market are quite a bit higher than the 20%, given your recent performance and the outlook we have seen so far? So that's my first question regarding that warning.

And the second question is a bit related to the macroeconomic wording, which is basically the explanation for that. That sounds a bit vague to me for several reasons. I mean, telecoms are not at all cyclical, we haven't seen that elsewhere. Demand for cybersecurity solutions should certainly be picking up, given the war. Could you please elaborate on what you actually mean by macroeconomic challenges in terms of this?

J
Jan Häglund
executive

So on your first question then for the full year. Well, in the report, we also state that we have variations between the quarters, we've had that in the past and as Network Solutions grows and becomes a bigger part and has become a bigger part of the company, 73% now in the quarter, those variations increase, not decrease. And that is also the case for our new and acquired business, AdaptiveMobile Security, which also follows different patterns, not necessarily equal between different sequential quarters. So I think that's one piece of it.

Another part of it, is that we are working on a large project, follow different delivery milestones, and that also revenues and milestones, that will also causes these variations and in this case, we do expect that some of that will happen during later part of this year. So -- and then the third component for us, [indiscernible] on the cost side, where we already in the fourth quarter anticipated the need for some restructuring of our legacy business. Due to the downturn of legacy business, we also took a decision to focus more and in particular, step away from a not favorable market and small-scale virtualization. The full effect of that restructuring will take part from second quarter.

So all in all, this means that we estimate that the profitability for the full year should come up, relative to the first quarter. But given macroeconomic environment and what remains here is, some of these unknown effects, where we have seen indications, for example, inflation pressure, which is a cost driver for us and for everyone, we also see significant currency fluctuations, which do affect our numbers and have affected our numbers. I mean, those are some examples, tangible examples, and then there are more non-tangible examples. But all in all, during the first week -- the first quarter and some of those now, we see it prudent to say that it's going to be challenging to reach the profitability target for the year. However, long term, we still believe, both in revenue growth, as well as in high profitability, where 20% or above has been our target and remains our target.

F
Frank Maaø
analyst

Okay, sure. Second question, a follow-up on AdaptiveMobile Security business you acquired last year. So you actually did see double-digit growth, as I understood it versus Q1 of last year, and you're happy about the acquisition. But still, in my view, I mean, it was quite below my expectations, and I was already aware that seasonality is different in that business, compared to your other business, and weaker in Q1. But still, there was a 40% drop quarter-on-quarter sequentially in sales. And did that surprise you, the magnitude of that was, I mean, the market doesn't seem to have been fully aware with, and also the gross margin effects that you've seen there, with softer gross margin, has that taken you in any way by surprise? Or is it just the analysts that are a bit surprised by that?

J
Jan Häglund
executive

Difficult for me to comment on the surprise with analysts. But overall, I think we can say that AdaptiveMobile Security is developing according to plan. And AdaptiveMobile Security, we did, I think, the acquisition because of the interest in the cybersecurity market. And we already saw during last year, if you compare with, as I mentioned, full year estimates that we gave and with second half performance, that was a strong seasonality during recent years, pre-acquisition. And we judge that seasonality, what we see right now. That is why this is a development on plan, and in fact, as you mentioned then, the double-digit growth year-on-year.

It has also been mentioned before that the differentiation of AdaptiveMobile Security is not [indiscernible] technology, but a combination of technology and expertise. As I think we all know, cybersecurity is a complex matter, where we can combine and need to combine technology, automated filtering for example, machine learning, with human experience and also the global reach to understand, how different trends, threats in different parts of the world will affect other parts of the world. That is why, we have a strong section of experts, that we bundle together with technology and our solutions. That has an effect on gross margin versus pure software product systems that we had, in many other parts of the business. But we believe it to be a strong and important differentiator in this particular...

F
Frank Maaø
analyst

Certainly a very interesting acquisition. But...

O
Ola Burmark
executive

And the comment on our internal expectations, I would say, Adaptive is delivering exactly according to our expectations so far in the first quarter. So there are no surprises at all here.

F
Frank Maaø
analyst

Okay, good. But in terms of the variations between quarters, potentially also in gross margin, is there any pattern there? Is there seasonality also in the gross margin based on perhaps different mix between services and products through the year?

O
Ola Burmark
executive

Yes, of course, you will have -- since the same -- influence both sort of life of the software sales and services, the quarters, which is sort of the later part of the year, which is more license-heavy, will of course drive sales. And as we drive the license part of the revenue mix, the gross profit will increase. So if you have more services and less licenses in one quarter, you will have lower gross margin, and if you have the other way around, you will have higher gross margins. But that is the consequence of having a stable service business, which you can top with license and sales.

F
Frank Maaø
analyst

Right. So -- and the license business is more in the last half of the year, was that correct?

O
Ola Burmark
executive

That is the historic trend of Adaptive, yes. We expect the history to continue.

Operator

There are no further questions at this time. I hand back to you, [ speakers ].

J
Jan Häglund
executive

Thank you very much for listening and for following us. As said, we continue a positive view on the markets that Enea is addressing, with all the new things happening almost every day in cybersecurity, the sweet spot of us being a company with expertise, both in core networks and cybersecurity. We see ourselves well positioned for many exciting developments going forward, with our continued investments. We understand that we have a short-term impact on profitability, which we're not happy about. And I can assure you that we have a full focus on generating, both sales and growth in our growing area of Network Solutions, and managing them and being smart about how and where we invest going forward.

So again, thank you for your interest and all -- from us, Jan and Ola.