Enea AB
STO:ENEA

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STO:ENEA
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Market Cap: 2.1B SEK
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Earnings Call Transcript

Earnings Call Transcript
2018-Q2

from 0
Operator

Ladies and gentlemen, welcome to the Enea AB Q2 Report 2018. [Operator Instructions] I will now hand to our host, CEO, Anders Lidbeck. Please begin.

A
Anders Lidbeck
President & CEO

So good morning, everyone, and thank you very much for giving me this opportunity to walk you through our Q2 numbers. I will follow the standard agenda that we have, and that is to give you a short intro to the company and then dive immediately into the financials and then discuss our way forward and outlook for a few minutes. So you know by now that we're headquartered in Kista. We had revenue last year of close to SEK 600 million. We were close to 500 people, and we reinvested 17% of our profits into R&D, and still we delivered a 23% operating margin. And with the acquisition of Openwave, this numbers would have been close to SEK 800 million in revenues last year and close to 600 employees last year, with slightly diluted margin, but that will change during this year, as you will see in the coming slides.Our mission is that we provide the network software platform and services that our customers need to enable to face in tomorrow's connected society. So we provide the platform, we provide the software, but our customers provide the functions that you as a user are experiencing in today's connected society. The vision and mission, we found out wasn't enough to describe our company to customers and employees, so we also have a commitment, and that commitment is to work as a key contributor in the open source community. Open source is here to stay and is an important piece of being -- operating as a software company today in our space.The one of you connecting to this call might very well be relying on our software today because 3 million people -- actually, 1 billion people every day are relying on our software when they connect a call or when they're using their mobile phone to get online. And this staggering number is due to the fact that our 2 largest customers, Ericsson and Nokia, have been so successful in delivering the infrastructure that we're using to connect mobile phone calls and to connect to the Internet via a mobile device today. 50% of the 3G, 4G and 5G infrastructure and more are coming from these customers of ours, and our software is embedded in that -- in their products.But we do have other customers aside -- or apart from that. We have other verticals. We are in heavy trucks, we are in home electronic equipment, we are in other telecom equipment, and we are in satellite equipment. We are in many different devices around the world and, often, with leading customers in their respective sales. With the acquisition of Openwave, we are also now taking a step closer to the end user by getting 7 of the 20 top operators in the world using our software to manage the traffic in the networks. And it's a wide geographic spread of these customers, and we're very proud of now also touching the operators directly.So with that, let me jump into the financials. And on Slide 10, we can again present that we posted a record operating profit, 48% growth over the same period last year, excluding nonrecurring costs. And the operating profit was SEK 46 million -- or rather SEK 45.9 million. That's the highest operating profit ever for Enea. And if you take away the nonrecurring costs and compare apples-and-apples, it's a staggering 95% growth over the same period last year and an operating profit of SEK 44 million in the second quarter.Also, the operating margin was very strong with 21.5%, excluding the operating -- the nonrecurring costs and also including the nonrecurring costs, which was of SEK 1.9 million. We also have close to 21% operating margin with 20.6%. Earnings per share are up 90% over the same period last year to SEK 1.83 a share. And that's the highest EPS ever in the history of Enea if you exclude the capital gain when we sold the Nordic consulting operation.Also, on the right-hand side of the slide, you can see this -- the pattern that I really like to see, where we have year-over-year growth in profits, but we also have sequential growth in our profits. And this is a very nice pattern. The similar pattern you can see on revenues on the next slide. So we also have record revenue growth. This is the highest revenue growth on record. It is the 16th consecutive quarter of year-over-year revenue growth, and it's also sequential growth over Q1 this year. This is the highest Q2 revenue in 10 years, and it's also the highest revenue as a software company since the divestment of the Nordic consulting operation. So 44% growth, and also when we adjust it for currency, and you might be surprised, but there is still very little currency effect in Q2, so also 44% growth, adjusted for currency. And that can be compared with a pretty good quarter last year, where we had 20% growth and 17%, currency adjusted. So really good quarter both from an EBIT -- or from a revenue perspective, from an EBIT perspective and from an EPS perspective.Obviously, a lot of this growth in these numbers are coming from the successful acquisition of Openwave Mobility. But if we split revenues on geographies, you can see that we also are growing in EMEA. We have changed the name that we used to call Europe to reflect the fact that we today have much more customers also in the Middle East and Africa. Here, we have 11% year-over-year growth, and this region now represents 51% of our total revenues. But with the acquisition of Openwave, we have significantly increased our footprint in the Americas. That now represents 32% of our revenues. And we have a staggering 72% year-over-year growth.But the most interesting thing then, and you who are following these calls for the last couple of years have heard me say that my ambition is that we would increase our footprint in Asia, to make sure that Asia represents the higher portion of our revenues. And with the acquisition of Openwave, we have almost tripled our footprint in Asia. And Asia now represents 17% of our total revenues in the quarter, and that is due to revenue increase mainly sourced from Openwave of 234% compared to the same quarter last year. But obviously, that is not going to happen in that comparison. But from Enea perspective, we have a much more even revenue spread from a geographic perspective, and that is very satisfying. Also, if we split revenues on products, we see both the strategic shift, and we also see a very important shift from an Enea perspective. Operating system, which is the software product group that this company is built on, now represent only 31% of our total business. And the biggest piece of the pie is Network Solutions, and Network Solutions is where we have grew both the DPI acquisition we did December last year and now the Openwave Mobility acquisition. It represents 51%, and it's also the fastest-growing product area. So the biggest product -- or the biggest product group we now have is also growing the fastest, which is obviously better than if it was a smaller piece of the pie that was growing the fastest. So we're very happy with this shift, and it's obviously something we've worked hard to create. And it's a strategic change in the -- in how you should view Enea and the Enea going forward.Also, a shift coming from the acquisitions and coming from the fact that these acquisitions that we've done, both December 2016 and then March 2017, that these acquisitions have a higher portion of software revenues and a smaller portion of services revenues. So this has taken down the Global Services business to less than 20% of total in the quarter. And that -- an important shift that I'll come back to in a minute. But I would like to say that, yes, the percentage -- the total percentage of Global Services is down, but we have a very positive 18% growth year-over-year in our Global Services business. And that's due to a couple of things: stable growth that we've had for many years now in our European operation based in Romania; but we now have added to that in Europe also a bridge services operation in Sweden that we've won some businesses with over the last couple of quarters and the stabilization in our U.S. operation. So with that, we have created this 18% growth over last year in our Global Services operation. So that's very good.But maybe coupled with the change in products, also this slide, when we measure our revenues on services, worldwide software sales and Key Accounts, you see a tremendous change over the last couple of years. Some years ago, our Key Accounts represented 60% of our total business. In Q2, they represent 28% of our total business. Some quarters ago, Global Services represented 30% of our total business. Today, it represents 17% of our total business. And that's thanks to very good performance in the Worldwide Software Sales operation, coupled with the 2 acquisitions of Qosmos and Openwave.And not only is this a change on this slide, but it's also reduced the dependency on the single product that I talked about a couple of slides ago and on a few customers. So it's a key change in the business of Enea. And it also improves, obviously, our gross margin because the mix of software and services has changed dramatically over the couple of years, as I'm showing on this slide.So important changes taking place in the company, and I'll discuss that a bit more when I talk about our way forward and outlook. But I have here with me our CFO, HĂĄkan Rippe, and I would like him to go through the following slides about our financial position.

H
HĂĄkan Rippe
Interim Chief Financial Officer

Thank you.So cash flow for the quarter was also at a record high of SEK 95 million from cash flow from operations. And as you know, our cash flow from changes in working capital is typically, as we mentioned, affected by major payments that can vary between quarters. We have such positive effects in Q2, whereas we had some pushover from Q1. But also, a significant contributor to the strong cash flow from change in working capital was related to the settlement of the unilateral price reduction, which we reported on June 5, of SEK 24 million. But also, the underlying cash flow before change in working capital was almost as strong with 148% growth year-over-year. This is obviously very good news since we, since last quarter, had a SEK 500 million bond -- senior bond in addition to the bank loan that we took in Q4 2016, which is now amortized down to SEK 99 million outstanding. This, in total, means that our total cash position at the end of the quarter was SEK 220 million. And the net debt position improved significantly from SEK 558 million negative -- or at a net debt of SEK 558 million end of Q1 to SEK 480.6 million, again, very positive given the financial position that we have. So the equity ratio, yes, it's down year-over-year, but it's up quarter-over-quarter, as are the other financial metrics related to our balance sheet, such as the net debt to EBITDA as well as our debt service ratio. So all in all, a very strong quarter improving our balance sheet and financial position.

A
Anders Lidbeck
President & CEO

Thank you for that, HĂĄkan, and that takes us into a few slides on way forward and outlook. And let me start with this slide, #18, challenges and drivers. We've talked about this many times before, but from an Enea perspective, we do have had a couple of initiatives or strategic directions over the last couple of years, and that is to reduce the dependency on the -- on a single product or on a few number of customers. That is that with the changes in the marketplace, in the fierce competition from open source and the changes of product mix, we have said that we think that acquisitions and strategic acquisitions, complementary acquisitions is the best way for us to accelerate our growth and to build a stable business going forward. With acquisitions, we also get to the objective of expanding our portfolio and expanding the addressable market, and to do that not only with a product or with the technology, but with both good acquisitions bring a -- an organization behind it, a culture behind it, an infrastructure behind it. And we have said since a few years now that we prioritize growth before margin expansion. We've said that our ambition is to keep operating on, above or around 20% operating margin, but we want to build a bigger company. And we want to build that because we think size matters, it's both from a -- the perspective that the bigger the customers are and the more important we are -- our technology is for our customers, the more important for them it is that we are a credible vendor. But also, if size matters from a leverage perspective, we do operate in a global business and so have the 2 important acquisitions we've done lately. As a software company, in our business, you normally do become global very quickly because the customers are global. But then it's not viable long term to have small offices around the world. You need to have bigger operations in the big countries to create sustainable profit expansion or profit growth. There is also challenges in the market with a -- an explosion in mobile broadband. And there are other challenges, like I said a few minutes ago, with open source. So for us, this has been an important journey that we started some years ago.So what we want to achieve with the things I discussed on the earlier slide is to move up in the software stack, to have more focus on software on the application level but also move up the value chain so that we can have our software as a complete solution rather than as a software component in someone else's product that they are selling to the customer. And with that, we also want more dialogue and engagement with the end users of our software. And this dialogue with the end users is not only an effect of us moving up the value chain, but it's also an important discussion and dialogue to have to put the requirements down in the software stack that builds up to the product that we're selling to the end users. So this becomes an ecosystem where we want to play also higher up in the value chain. This has changed our business over the last few years. And in Q2, you can see this pretty dramatic change from an Enea perspective. That our services, our expert services, that's a very important piece of our business, represents 17%. And that's in itself important to drive gross margin and to drive operating margin expansion going forward, that we not have a too big services revenue stream. Operating systems, where we have had flat or slightly declining business over the -- in this quarter and over the last few quarters, now represents 20 -- 31%. But the biggest pie, the Network Solutions, coming from our own organic development, where we're creating a platform for network function virtualization and open source-based platform; with the DPI acquisition, where we can collect, aggregate and leverage information about the network traffic in what we call network intelligence; and the mobile traffic management and cloud data management, where we help our operators, who are customers that are operating a network to manage traffic and manage subscribers, this is our business going forward. And the reason that we want to be in this space and that we're really excited about this change is also the fact that this marketplace, there is a natural demand in this marketplace based on the explosion in mobile data traffic. Many are there who followed the FIFA World Cup now or checked some goals, checked some matches via their mobile devices. There's some doubling of the numbers of subscribers that followed this FIFA World Cup compared to the Brazil World Cup 4 years ago. Also, if you look at fiscal numbers and looking out -- at how mobile data traffic really grow going forward, you can see it will double again. It will triple again according to Cisco's statistics. And the main driver of this is video. Video is what is fueling the explosive growth in mobile data, and video is where Enea has its strong position today and going forward. And encrypted video is where Enea has an even stronger position with this acquisition and in our business going forward.So with that, I would like to take a step back and talk about 2018 only and the outlook we have for 2018, and that remains unchanged. And it is to achieve revenue growth and improve operating profit over 2017. So with that, thank you very much for listening, and I would open up for questions.

Operator

[Operator Instructions] Our first question comes from the line of Viktor Westman of Redeye.

V
Viktor Westman
Analyst

I was wondering about the organic sales in Worldwide Software Sales segment. It seems a bit weak. Is that related to Qosmos or old Enea?

A
Anders Lidbeck
President & CEO

Well, thank you for asking, Viktor. Why do you say it seems weak?

V
Viktor Westman
Analyst

I mean compared to last year.

A
Anders Lidbeck
President & CEO

What we have is, as we have talked many times, we have different pieces of old Enea, and we've broken revenues on what we've shown here. We also -- so if we compare our operating systems business, it's down a bit, but that's mainly due to our Key Accounts. So if we look at -- if you would take away the Key Accounts business, the remainder would show flat to a few percent positive growth year-over-year.

V
Viktor Westman
Analyst

Okay. And can you also just clarify on the new royalty agreement? Will the royalty be calculated as you preferred it to be calculated? Or is it favorable for you to, so to say, or vice versa?

A
Anders Lidbeck
President & CEO

I can't go into details about the new royalty agreement, but I think, obviously, it's an agreement that both parties have signed. So both parties have agreed to that. I think the biggest characteristic of this new agreement is that it's clear -- much clearer compared to the existing agreement. I've written in my CEO letter in the interim report that we should still expect a continued decline with our Key Accounts, and that is due to the fact that there is more and more open source software built into the new products. So an agreement is not changing that. The biggest characteristic of the new agreement is that it's more clear.

Operator

[Operator Instructions] We have one further question coming through. That's from Victor Höglund of SEB.

V
Victor Höglund
Analyst

I have just a few questions on -- in the quarter, how has the settlement affected sales that you did or that you announced with the larger customer? Are there onetime revenues, so to say? I -- maybe you mentioned that before, but I missed it.

A
Anders Lidbeck
President & CEO

All right. So the agreement with -- that we both press released in the beginning of June and that I discussed in a few words in the CEO letter and in the report, it's about paying the outstanding receivables, so making that even, and then about change with how to calculate revenues going forward. So that has not -- that has no effect on the business in the quarter from -- but from a cash perspective.

V
Victor Höglund
Analyst

Okay. So there was no positive one-off on sales?

A
Anders Lidbeck
President & CEO

So what we don't have also is an agreement to -- for the same customer to use our software in their 5 key equipment. And that was the 10 million sale, and that 10 million has impacted the second quarter.

V
Victor Höglund
Analyst

Okay. And I had that 10 million will not be there, but a new agreement will be there the same way as it is now?

A
Anders Lidbeck
President & CEO

Exactly.

V
Victor Höglund
Analyst

And then looking on costs here, would you say that all of the synergies related to the acquisitions are now done? Or can we expect costs to maybe come down a bit further ahead?

A
Anders Lidbeck
President & CEO

So what you're now seeing and what's happened during the first 2 quarters of 2018 are the effect of the synergies and the rightsizing project we did summer 2017. So we said that, that would have an impact on 20 million full year 2018, and that's -- that you're seeing those effects now. You have seen those effects for the last 4 quarters as well. Very few cost synergies have been achieved; after the last acquisition, I would say 0. But as we said when we presented this acquisition, it's not the cost synergy play, it's a growth play, and we are very proud and happy for all the employees working in the acquired units. What we will see, though, going forward, there's some work that we have initiated in -- on IT -- or internal IT systems, where we could see some synergies going forward, both cost synergies but also operational synergies fueling better and faster -- a better business. You will also see some synergies in co-locations, with co-locating people in the smaller offices around the world. And going forward, over time, you would also see some cost synergies of traditional -- from a traditional definition. But that's not the most important thing in this acquisition.

V
Victor Höglund
Analyst

Okay. And on Global Services here, it's -- so it's an improvement here in the sales trend. Do you see more order requests or increased here or less ahead? Or is there any concern related to anything? I mean, in the past, you've had some issues in the U.S., for example, when there has been some political movements. Is there anything similar to that coming up now? Or is maybe the increased spending in some areas more positive for you? How do you view?

A
Anders Lidbeck
President & CEO

Well, I think what we said going into this year and what I wrote in these reports -- the interim reports of the Q3 last year was that we would see growth -- businesses turning back to growth. And the biggest reason for that is stabilization of the top line but also that the comparables from the year before has come down. So we have a business that is on a lower level than a few years ago. But year-over-year, it's still growth because we're improving on smaller numbers. The thing that has gone away from the business, mostly so in the U.S., is some of these government contract projects in the aerospace industry. So we're left vulnerable for that going forward, but still obviously, things can happen. But obviously, now we could see continued year-over-year growth in our services business also for the remainder of this year.

V
Victor Höglund
Analyst

Okay. And then I think -- and you mentioned that the gross margin is strong here. How -- do you expect that to continue and improve ahead or remain at this level due to product mix? Or how should we think about that?

A
Anders Lidbeck
President & CEO

Yes, so gross margin, it's an immediate effect of the change in revenue mix. So there are very few initiatives beside what I talked about before and very little we can do to -- well, let me rephrase that. You should not expect any changes on gross margin when you do assumptions going forward. But the change has already happened due to the fact that revenue mix has changed. So that's the gross margin level you should expect going forward.

V
Victor Höglund
Analyst

Okay. And last question, looking more longer term here, when you see now the trends on, call it, old Key Accounts, old Worldwide Software Sales and comparing that to the trends you expect and already see from acquisitions and in Global Services, do you expect this to trickle down into organic growth over time and at solid levels? Or do you see -- how do you view all the trends and adding them together?

A
Anders Lidbeck
President & CEO

So it's really back to what I've discussed on this call and what I've discussed in meetings. So we had a couple of pieces in Enea with different trends. And the Key Accounts trends on operating systems, due to the fact that these customers are using more and more open source, that trend is down. And that trend, we think, will continue to go down going forward. But it will be less and less important from an Enea perspective as this piece of the -- or this portion of our revenues are shrinking. And obviously, we have now 18% organic growth in our Global Services business, which is a huge number and a very good number. And we also expect then -- and we had 44% growth in our total number, so obviously, more growth than given the decline in Key Accounts on software. But clearly, going forward, we do expect double-digit growth in our software sales operation outside the Key Accounts. That's what we're aiming for, that's what every commission plan is geared towards, so that's absolutely the plan.

Operator

[Operator Instructions] Okay, so no further questions coming through. I'll hand back to our speakers for the closing comments.

A
Anders Lidbeck
President & CEO

Okay, thank you very much, and thank you for your questions. Thanks for organizing this call, and looking forward to talk to you again after a successful third quarter. Bye-bye.