Enea AB

STO:ENEA

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

Welcome to the Enea Q2 Presentation for 2024. [Operator Instructions]

Now, I will hand the conference over to the CEO, Anders Lidbeck. Please go ahead.

[Anders Lidbeck, executive]

Thank you for that. Good morning, everyone. I'm here with our CFO, Ulf Stigberg and we would like to thank you for giving us this opportunity to walk you through our Q2 '24 results. We will follow this a normal pretty straightforward agenda; a short intro to the quarter, discuss the financial results, and then we'll finalize we're talking about how we see the short-term outlook and our way forward. After that, there will be an opportunity to ask some questions.

So, if we look at Q2, it was actually a really good quarter for us. We had 14% organic growth and 35% EBITDA margin. We had an earnings per share of SEK 1.63, which is way better than Q2 last year, and it's really not fair to compare because Q2 last year, we did a lot of one-off MRIs. And we haven't created this result by changing any of our R&D investment. We still invested 23% in R&D and 25% in R&D for the first half year. I would like to just remind everyone that the vision of Enea is to make the world's communication safer and more efficient. And to do that, we have one of the most competitive portfolios in our industry. We have the world's most powerful DPI engine in our Embedded Security Product Group, where we can identify more than 4,000 protocols and applications. That product is embedded in our traffic management solution where we promised to make your network 10% more efficient based on optimizing video traffic.

On top of that, we have our data management application, our Wi-Fi services and our UDR product, the 5G database. And we have our network security operation that keeps your network safe with the most competitive messaging, signaling firewalls on the market and the best voice protection use case that you can buy. To better reflect our business and to make it more transparent for investors, we have started to split our revenues slightly different from the start of this year. So, we divide revenues on networks, security and operating systems. And on this slide, you can see the shading here. So, the network is the left side of the portfolio, security is the right side of the portfolio and OS is the future product that Enea was built on.

There are many great things in Q2 that I would like to discuss here. First of all, obviously, the 14% organic growth in our total business, which is -- we're very proud of that. The 15% organic growth in our security business is also very impressive given the conditions and very much in line with the long-term financial ambition we have of double-digit growth in our focus areas. The 35% EBITDA margin and the 25% organic growth in our network business is obviously to a large extent, based on the vote of confidence we got from a very large North American customer at the very end of the second quarter where they placed a $2.9 million license expansion deal with us.

This is obviously very -- we're very grateful for this from a numbers perspective, but we're also very happy with this deal from a -- from any other perspectives as well. This is for the 5G UDR with the 5G database product, our Stratum database, a UDR in the 5G network. That was the product that caused some troubles 12 months ago. Now, we have invested a lot. We changed the organization during 2023. And we have produced a product that today forms the basis for implementing true 5G in North America and that makes this deal very significant for us. It's also a testimony of the competence of the R&D organization in Enea. Even though we're a midsized company, we can, for sure, build very, very competitive products and I'm very thankful for the engineers we have in the company.

The customer trust and the deals that happened in the second quarter was not only this big one. There was also a number of smaller deals below the $1 million mark that we closed in the quarter. But aside of that, we also had some very good joint activities with key customers. For example, we had a seminar with Ukraine's leading operator, Kyivstar on how to build a resilient telecom operation, that was very well received. We have done joint webinars. We have had speaker slots on major events. So, from a customer market perspective, Q2 was actually pretty notable.

From an operational perspective, quality is really important to Enea. And as you can imagine, it's also very important to the buying decisions from our customers. We've been ISO 9001certified for a long time and our cybersecurity operation is ISO 2701 (sic) [ 27001 ] certified. The distinction here is that 2701 (sic) [ 27001 ] is slightly more focused on cyber and IT security. But we did a recertification. You have to do that regularly. We did that in the second quarter. And we got a lot of praise from the auditor. Not only did we get the recertification, which, of course, was the primary target. But to hear the praise from the auditor on how we've implemented our new strategy, how our processes, seemingly is there not only from -- for the sake of the processes, but actually for creating value for our customers was very rewarding to hear.

We also discussed how we found that our new values and the new strategy was well appreciated throughout the organization and it was also nice to hear. And interestingly enough, where this is not -- it's a coincidence, it's not planned, we did our annual employee satisfaction survey also in Q2. And here, we got some great results as well. First of all, we had 98% response rate and I find that humbling that 98% of our employees spend their time to answer lots of questions on how they feel working for Enea and give us good recommendation and advice on how to improve Enea as a workplace even further.

ENPS is Employee Net Promoter Score. That's how likely it is you would recommend Enea to your friends. And here, we had a significant up on the results 12 months ago. And also on the general index, we have a significant up on an already good result 12 months ago. So, that's very satisfying. And I think it's also important to the investors in Enea because Q2 is one quarter out of many. We've been around for 55-some years and we intend to be around for many years to come. So, we are on the journey that will come good quarters, that will come less good quarters. But the things that is happening under the hood is also important to build stability in the business going forward. And obviously, it's also very important for our customers and it is our customer that is driving our business and the growth for us.

With that, I would like to hand over to Ulf, who will take you through our financial results in some more detail. Ulf?

[Ulf Stigberg, executive]

Thank you, Anders. Enea reported strong sales in quarter 2. This is including license expansions and mainly related to upgrades and expansions from our -- mainly our current customers. We report a 14% growth over Q2 last year and 13% growth adjusted for currency. And the total revenues in the quarter amounted to SEK 239 million compared to SEK 217 million last year. The security solutions show growth in all 3 types of revenues. Licenses are up 6% related to mostly upgrades and expansions from current customers. Support is up 22% related to a stable base and also as a result of additional licenses in the upgrades and expansions. And finally, the services are up 38% compared to last year related mainly to projects and deliveries within the service organization.

Network solutions show a significant growth in software license revenues and as Anders explained earlier, of course, the main explanation of this growth is related to the expansion of the new deal of $2.9 million. We have a stable support revenue generated from current customer base. It varies a little bit over the quarters, but the underlying base is stable throughout the year. We had some lower revenues related to customer projects, but that also varies a little bit between the quarters. The operating systems develops according to plan, licenses lower as a result of -- we didn't have a sizable deal this quarter as we had in 2023 and the support revenues are lower and that following our expectations in this area.

Looking at the EBITDA margin, we report 35% for the quarter. And excluding nonrecurring items, we reported 32% EBITDA margin. We also can see an increase in gross margin to 79%. And this is, of course, related to the mix of the revenue and in quarter 2, we see a higher share of license revenues. Of course, one of the explanations of the good margin is that we also reduced operational expenses with some SEK 10 million lower spend equal to 7% lower cost base compared to 2023.

Looking at the cash flow. During the last 12 months, our cash position has improved. In the current quarter, Q2, we have a slight lower report of operational cash flow and that's mainly related to working capital increase as a result of the increased sales. Operational cash flow was SEK 35 million compared to SEK 77 million last year. Net cash flow, minus SEK 12 million compared to SEK 20 million last year and our net debt improved to SEK 144 million compared to SEK 220 million last year. And this drills down to an equity ratio of 66.5% and the net debt to EBITDA of 0.5.

All in all, this the cash flow position gives us the opportunity to continue the buyback program. In quarter 2, we bought back 358,000 shares for a total consideration of SEK 23.4 million. And this repurchase program are since 10th of May within the framework of the authorization from the Annual General Meeting in May that we are -- we have a mandate to buy back shares up to SEK 100 million. And this is under the Safe Harbor regulation.

[Anders Lidbeck, executive]

Thank you, Ulf. So, let me finish this presentation by taking a look at Enea going forward. And I would like to start by talking about the significant investment we're doing in product development. So, during the first half year, we reinvested 25% of our revenues in R&D. If you think about that number for a few -- for a second or two, it's a big number when you translate that into actual euros and dollars. It's a big number for any company. It's a big number for a 55-year-old plus company like Enea. But we are proud of it, and we will continue to invest a lot in R&D going forward.

I would, though, like to underline that the difference today compared to 12 months ago is that we're not building up our balance sheet. So today, our amortization and our capitalization are very much in line. And in the quarter, we actually amortized more than we did capitalize. But the investment in R&D is obviously also not just pooling money, it's having very skilled engineers building great products. Products are not just happening and the improvement of quality and performance of our products is also not just happening. It's the grinding day-to-day work, overnight work, over weekend work canceling vacation work from the large group of engineers we have within the company. It is the largest part of our workforce. And again, we're proud of them. Their spread in many different countries and we have a great resource pool there going forward.

Our Stratum product, it's a true 5G UDR, the way it was intended to be many years ago when the telecom industry discussed 5G, is utilizing open standard interfaces to create a multivendor network that was intended by the industry. We are developing products for things that matters. So, CLI spoofing attacks is very much for real. It happened to the Jo Biden campaign in the first quarter in New Hampshire, where at least it was investigated in -- by the authorities in New Hampshire. It happens in Egypt and Telecom Egypt could tell the market that by using our products, they have lowered the number of spoof calls with 90% using our firewalls.

We're taking this call over mobile video. I guess many of you are following in using mobile video. Mobile video today is 70% of the mobile traffic and growing significantly more than the rest. We help optimize and accelerate video traffic and by using our products, a major European customer of ours lowered the impact, that's the reverse way of accelerating video. So, by optimizing video traffic, they lowered the impact of this by 16% during peak periods. We're very proud of this product and we'll continue to invest a lot in traffic management going forward.

We're also well positioned in the market. Again, take a second and take this slide in. This is what happened in Enea in the market during the 90 days of Q2. So, we were in more than 10 events. We were -- had the speaker slot on the regulatory event in Copenhagen discussing cybersecurity. We had a webinar together with the CTO of Kyivstar, Ukrainian Kyivstar, talking about how to build a resilient telecom operation. We won three awards, 2 awards, cybersecurity awards on the RSA Conference in San Francisco. And 1 ROCCO award or accolade taking our product up to Tier 1. And we've been in the media print many articles, many quotes together with customers, together with partners or on alone, all happened in Q2. And this we will continue with during Q3 and Q4 and 2025 and going forward. Being well positioned in the market, being a thought leader and being where the action is happening is something that's very important to Enea.

With all this happening, we are reiterating our long-term financial ambition of double-digit growth in our focused business areas with an EBITDA margin above 35% and with strong cash flow. So that's our long-term financial ambition. For 2024, we really reiterate the outlook we've had since the beginning of the year. The economic circumstances within the industry will continue to impact us. But for the full year 2024, we expect strong cash flows as well as an EBITDA margin above 30%.

So with that, I would like to thank you all for listening and I would like to open up for potential questions.

[Operator]

[Operator Instructions] The next question comes from Jesper Von Koch from Redeye.

[Jesper Henrikson, analyst]

Good morning, gentlemen, and congratulations for the very strong report. All right. So, let's start with the progress that you've obviously made with the Stratum products. I mean, you say that it's an extension deal of one of the largest deals from 2020. But could you just elaborate on the deal? And yes, from the customer's perspective yes, what's it like?

[Anders Lidbeck, executive]

Thank you, Jesper. I can't elaborate a lot more than what you just said and what we have said in our press comments. So, we signed a contract with this customer in 2020 for a UDR product. We worked since to implement this and to do the developments necessary. And the contract is for a number of subscribers or a number of users and that's a staggered contract, so the more users, the bigger the numbers. And the customer has the need to increase the license capacity so that they can increase the number of users in their network. We're using this product, their 5G users using this product in their network. And that's the reason for the contract and that's the situation with this customer.

[Jesper Henrikson, analyst]

All right. And do you see -- I mean I guess the bigger question here is like the competitiveness of the product and where you see the market is going? Because I guess, last year where, I guess, like 15 months ago or something like that, many, many got, where is that this product was not as great. But could you just talk -- but I guess this is reassuring of kind of the opposite. But could you just elaborate on what you see in terms of competitiveness of the product?

[Anders Lidbeck, executive]

We're very proud of the product. And clearly, this customer likes the product a lot. The landscape has shifted a bit over the last 5, 8 years when it comes to 5G. And as we all know, the roll out of 5G has been delayed. And during the delay, we've also had the impact of COVID. We have had high rates of inflation. We have a political instability in the world. And that really then there is some more caution within the market on how to build 5G. 5G was supposed to be a multi-vendor type network. And this product is very true to that original intention based on open and standard interfaces. So from that perspective, it's a very competitive product.

The flip side is what I just discussed that we're still a midsized company competing with very large companies in this area. And for the last period of time, the large companies have won more of this type of business than the midsized companies. For me, this is the pendulum that will continue to swing. And when it swings back to more midsized companies and more multi-vendor type network, we have a very great position with this product. But as I've said during the last 12 months, this is not the product in Enea's portfolio and it's not the weak product that we're building our future growth plans on. It's one of many and we're grateful for the win on this product as we did in the second quarter.

[Jesper Henrikson, analyst]

All right. All right. And -- but just in terms of like other customer engagements that you have, what do you see the market is like?

[Anders Lidbeck, executive]

Yes. So, you should not do any extrapolation based on the second quarter on this product. It's one of the products. It's -- as I've said during the last 12 months, we really refocused our efforts after what happened 18 -- 15, 18 months ago to build quality and building performance in this product for the number of customers we had -- and we haven't yet opened the sales channel to sell this to a lot of new customers. So, please don't do any exploration based on this particular product. It's more interesting to see the 15% growth we have in our security business, which is very much not related to this and not at all impacted by this in the second quarter.

[Jesper Henrikson, analyst]

Yes, yes. And about the security business, could you just like elaborate there too about what you see in the market? And I mean it is a hot market, hot area with many like start-ups going into and so on. So, how do you see yourself like your competitive position and also what the market is like?

[Anders Lidbeck, executive]

Well, I think it's -- we have a phenomenal position and I think it's a phenomenal market that is, in many ways, underestimated, meaning that our position in that market is underestimated. You're talking to a company that is -- has a leading space when it comes to secure telecom networks around the world, not in Sweden, not in Europe, not in the Western world, but in the world apart from the countries that we are not working in like the sanctioned countries. But we are in South America. We are in Southeast Asia. We are in Africa. We are in the Middle East. We are in Europe, we're in the U.S., we're in North America.

So, we have a great position. We are on the speakers' podium when the regulators in Europe wants to talk about on how to protect networks going forward. We are in the Middle East as the leading operator in Egypt with Telecom Egypt, protecting their network when it comes to spoof calls. We are winning awards for our DPI product on the RSA event in San Francisco. So, we have a great position and it's a great market and everybody talks about it. For the citizen of a country, this is super important because we're talking about personal integrity. We're talking about financial integrity. For companies in different countries of the world, this is super important because when you get attacks on your networks, you can be out, look at what happened in Sweden for many companies in the first quarter. And it's very important to governments and therefore, to regulatory authorities around the world because this can also hurt countries like it did in Ukraine, some time ago.

So actually, about comparing this to what's happening in Ukraine on other -- from other perspectives. But from a cybersecurity perspective, it can also be very detrimental to individuals, companies and countries. So, that's why everyone is talking about this. Again, there is, for sure, also a flip side here and you can't look away from the fact that the financial environment has been in a turmoil during the last period of time, especially in the telecom industry. We are selling cybersecurity products mainly to the telecoms industry. We're protecting telecom networks, which is the backbone for any cybersecurity activity. But the investment hasn't been as high in general and that's also put a slight -- a thinner wet blanket, but still a wet blanket of investments. But 15% organic growth in this area in the quarter and 10% organic growth in the first quarter in this part of our portfolio. We're very thrilled with that. We're very pleased with that.

[Jesper Henrikson, analyst]

Yes. I can imagine. And just about the market outlet. I guess this may be more from the -- for the networks business. But in the end of May, you said that [ Redeye ] growth say that you noted a noteworthy improved market from, I guess, like February or March, something like that. Could you just give us an update on what you see in terms of like whether it's heating up somewhat?

[Anders Lidbeck, executive]

I don't think I said I noticed a noteworthy improvement of the market. I hope I didn't say that. I meant that we could sense a -- because the signs of improvement, but we are not doing macro analysis. We're using the same firms as anyone else. And there are other companies bigger than us that have better understanding of the bigger macro trends in the industry. It is still a tough industry. I discussed that in the CEO letter, I've discussed that in this presentation. We do see a continued tough climate going forward. But again, I can only base some of this answer on the facts.

And the fact is that we have double-digit growth in the first quarter, we had 15% growth in our cybersecurity business for telecoms, mainly telecom customers in the second quarter. Compare that with the negative growth in the overall market. And within that mix, you get a view on our view of the market going forward. It is a tough market. Cybersecurity is where you put your money, monetizing your networks is where you put your money, optimizing your networks is where you put your money and we are in all these areas. So, it's a tough market, but we're cautiously optimistic going forward about our business.

[Jesper Henrikson, analyst]

Perfect. And then just the last one. After the Q1 report, you mentioned that, I mean, you opened up somewhat for M&A, though not like already active in it. But can you just give us an update there if you've taken any steps?

[Anders Lidbeck, executive]

Sure. So, we are -- acquisition is part of our strategy. It's also discussed in its interim report in our long-term ambition. We think that Enea would perform even better at a larger scale. I've discussed many times before that our operation in South America, our operation in Asia and even in North America is subscale and would be more profitable and more successful, would it be slightly bigger. So, that's one aspect of it and to continue to strengthen the portfolio with interesting complements to what we already have is also something that we're looking at. We're not in a hurry.

As Ulf discussed, we are doing a buyback of our shares of some 20 million-plus in the second quarter. So, we're doing lots of things for our shareholders to improve shareholder value. But when we find the right acquisition target at the right price, the right team, the right culture fit, for sure, we will deliver on the long-term commitment we have to strengthen the company also inorganic.

[Jesper Henrikson, analyst]

All right. Great. Thank you very much and good luck going forward.

[Anders Lidbeck, executive]

Thank you, Jesper.

[Operator]

The next question comes from Simon Granath from ABG Sundal Collier.

[Simon Granath, analyst]

And congrats on the strong results. Just 2 quick questions from me. On the Stratum deal, may I ask if it's possible for you to comment if you see further upside on the specific customers in the near term with them, expanding more with the Stratum product?

[Anders Lidbeck, executive]

So thank you, Simon, and thank you for the question. I think I sort of answered the question already. It's a staggered contract, the more subscribers in the network, the more -- the bigger the license, the bigger the numbers for us. And for sure, that's part of the plan going forward. But again, please don't build any extrapolation on this deal in this specific quarter. But you already in your previous noted this press release and in the press release from 2020, you can see the expectation on the total contract and that has not materialized yet. So, we will work to try to secure that total value from 2020 going forward.

[Simon Granath, analyst]

Perfect. Thank you for elaborating on that. And then just secondly, I know that head count increased sequentially for the first time in quite some time. Which areas and which markets are you currently mainly recruiting in, if I may ask?

[Anders Lidbeck, executive]

So, we might have a slight increase in head count sequentially, as you note. But it's not so that we -- when we look at our total budgeted numbers for the year or looking at any sequential growth of total cost for our operation. We are recruiting in India. We're recruiting in Osijek, Croatia and we're back-filling positions in, in some other operations we have throughout the world.

[Simon Granath, analyst]

Again, congrats on the results.

[Anders Lidbeck, executive]

Thank you so much.

[Operator]

There are no more questions at this time. So, I hand the conference back to the speakers for any closing comments.

[Anders Lidbeck, executive]

All right. So, we have a question on text here. And that's about the reservation we do for outstanding debt. I would like you, Ulf to answer this question.

[Ulf Stigberg, executive]

So, the question is related to the SEK 8 million we made a provision for a doubtful debt. And this is a customer that we have had open for quite a while. And we have negotiations ongoing, but nothing had materialized, no new agreement and no payments. So, we made a decision to make this provision for the remaining amount for this customer in quarter 2. We are still working and on the collection and there are some hopes that the longer time it pass, it's getting more and more demanding of course.

And related to this question, also where in the profit and loss we have made this provision.

And this is booked under the sales and marketing costs as a doubtful debt.

[Anders Lidbeck, executive]

Okay. Thank you, Ulf, and thank you for this question. All right. So, I think there are no further questions. And if so, thank you again for giving us this opportunity and hope to talk to you again in at least in 90 days.