Enea AB

STO:ENEA

Earnings Call Transcript 2020-Q3

[Operator]

Hello, everyone, and welcome to the Enea AB Interim Report January to September 2020. [Operator Instructions] I will now hand the call over to CEO, Jan Häglund. Please begin.

[Jan Häglund, President & CEO]

Good morning, everyone. This is Jan Häglund, the CEO of Enea. I'm here with Björn Westberg, CFO. Thank you for joining this call at this time.We will summarize the results of the third quarter as well as the period, January to September 2020. We will go through the details of the financial results, some of the most important news during the quarter and summarize with a way forward and outlook.Let me, first on Page 3, summarize the financial results for the quarter and the period. Our net sales came in at SEK 206 million, which is a decline from last year by 16% before currency adjustments. We have clearly seen effects of the ongoing corona pandemic on our business while the majority of our business remains stable, thanks to recurring revenues and stable customer contracts.Having said that, we also -- we have been able to deliver and maintain a strong operating margin at 23%, thanks to strong gross margins as well as an effective cost structure.Our net debt-to-EBITDA was 0.43 at the end of September, so we continue to improve and strengthen our financial position.Earnings per share for the quarter was SEK 1.44. Operating cash flow continues to be strong at SEK 83 million for the quarter. And we continue to invest for the future. We see prospects and possibilities in the areas that we operate. And we set aside a 26.4% of sales into R&D, which is the sum then of OpEx and capitalized R&D for the quarter.For the period, we have so far generated SEK 667 million of net sales that had an operating margin before nonrecurring items at 22.3%. Earnings per share at SEK 4.43 and an operating cash flow of SEK 213 million.On the next page, we just summarize a bit of the effect that we continue to see from the corona pandemic. As previously announced, we have seen during the year and continue to see delays in customer investments, which means that certain projects, large projects, for example, 5G investments are a bit delayed on the market, postponed into next year in many cases. And we've also seen some smaller projects, for example, software upgrades being postponed, either for financial or practical reasons.Enea also has a business in consultancy services and in particular, in North America, where our customers in aviation industry have suffered from the effects of the corona pandemic, we have seen and continue to see effects on our revenues.Having said that, the majority of our business is stable. It's supported by a high degree of recurring revenues and a broad customer base. And as shown before also, we have been able to mitigate the impact on our operating profit through cost reductions, giving us an efficient cost structure also going forward. We maintain our ambition to deliver strong margins at 20% or above.On Page 5, we summarized some of the key events during the quarter. Perhaps the key event was on October 1 when we announced the acquisition of Aptilo, a leading provider of policy and access control solutions for carrier Wi-Fi and IoT. I'll be coming back to more details on that. And Enea is a leader in video optimization. And one of the customers Vodafone Ireland announced that they've been able to see improvements in the delivery of their video services and, in particular, the quality of experience using our solution.We published a survey about Deep Packet Inspection that we did among customers. I'll be coming back to that result, but it shows the importance of our technology, which also gives us optimism going forward.We continue to win business in edge virtualization. The latest win here is with service provider inq., a Pan African, a cloud-based digital service provider but has selected Enea's NFV Access product for innovative security and SD WAN services.And finally, we continue, thanks to our R&D investments, to innovate the latest addition to our portfolio and solutions in video traffic optimization is a product called the RAN Congestion Manager. And it's pleasing to see that we have results from the field where we've been able to show significant increases in 4G RAN capacity. Something important because 4G continues to be important in terms of traffic growth for most of our customers. I'll be coming back to more detail.On next page, on Page 6, a summary of the acquisition of Aptilo. Aptilo is a Swedish company with international reach. It's a leading provider of Policy and Access Control solutions for Carrier WiFi and IoT. It's been deployed by more than 100 operators in 75 side countries, and sales and go-to-market models is both directly and indirectly. For those of you who know Enea, you'll see that there are a lot of similarities with Enea, which is why we believe that this is a perfect match. The combination of Enea and Aptilo gives us competence, footprint and portfolio in both 5G and Wi-Fi, in particular, Wi-Fi 6, the latest standard, which creates a unique offering going forward because we believe that these standards are complementary.It also strengthens Enea data management portfolio where we already have both products and competence in Policy and Access Control, and this is strengthened now by the acquisition of Aptilo. And we add new customers and additional sales capabilities to a large extent, complementary to what we have already.On the next page, some of the acquisition financials are summarized. The enterprise RAN value at the acquisition was SEK 150 million. We financed the acquisition through primarily a new bank loan, but also with own cash. We expect the acquisition to be EPS accretive from 2021. The acquisition will contribute to Enea's financials from the fourth quarter with expecting revenues above SEK 20 million. Transaction costs were SEK 4 millions, and they're actually booked and taken in the third quarter.Page 8 summarizes Aptilo's portfolio as well as strategy. Aptilo is a well-established offering in the market of both business-to-consumer Wi-Fi offload as well as operate a business-to-business Wi-Fi with installations across the world by more than 100 service providers. This is in places, for example, public places, shopping malls, airports, et cetera, where service providers choose to offload in high-traffic situation through Wi-Fi, adding additional capacity and additional spectrum.Aptilo has also more recently taken significant steps into the IoT, Internet of Things, market, offering them smooth and zero touch solutions for onloading -- onboarding IoT devices on Wi-Fi as well as cellular access. These are quite promising advances and something that we believe will pave the way for potential growth going forward. On Page 9, summarizing our vision then. Together with the assets we already have in 4G and 5G, both portfolio and customer footprint, and now the addition of technology and customer relations in Wi-Fi, we have unique position to deliver on a vision for a 5G core, and in particular, data management solutions for all kind of wireless technologies as well as all types of mobile endpoints. It gives Enea unique position on the market where we actually have a foot and competency in all kinds of technologies, and which we believe is exactly what the market will be looking for going forward since these different technologies are complementary.On Page 10, we show that Aptilo's customer base, which is primarily through strong relations with several service providers across the world, but it actually complements in a good way in Enea's customer base, which also is based on both direct contact with operators as well as indirect sales channels through large system vendors. Aptilo will then further strengthen our largest segment network solutions, making that segment even more important than before. In the quarter, even before the Aptilo acquisition, Network Solutions was about 2/3 of our revenues. And with the Aptilo revenues coming in, it will be an even larger share going forward.That's what I intended to say about Aptilo here. Two words about other developments, other positive development in Network Solutions. On the next page, Page 11, I'm coming back to what I mentioned about the survey that we did among customers for traffic intelligence. Enea is a leader in traffic intelligence, where we have a unique portfolio of classifying and identifying different kind of both applications and traffic types. We went out and asked customers how important they believe this is, in particular, for cybersecurity. And the response was quite overwhelming. 100% of those asked said that it's critical to be able to identify application in order to build future-proof cybersecurity solutions. And some 80% said that's different types of traffic, for example, video, audio, file transfer, et cetera, must also be able to identify in order to build efficient cybersecurity solution. So this is good news for us since we are the leader in software for traffic identification. We have a portfolio of identifying more than 3,000 different Internet protocols. And we are then optimistic to continue to win terrain with customers that need to have this embedded into their software in order to identify different kind of traffic.Another news on Page 12 is our innovation in traffic management. The latest addition to that portfolio is a product or a software called RAN Congestion Manager. And what we've been able to show now in real field operation is how this software can actually increase the capacity of 4G networks. While 5G, of course, is important and will be growing, we should also note that 4G traffic will continue to grow in all analyst estimates that we've seen probably until 2025 or beyond. And that's the reason why it's so important to continue to get as much capacity out of the current networks as possible. We've been able to show in real-life operation of more than 15% can be gotten out of network, in particular, in highly loaded situations, which is then a way for operators to prolong the life of 4G networks without additional hardware investment.With that, I'd like to hand over to Björn to give us the details of the financial results. Björn?

[Björn Westberg, Chief Financial Officer]

Thank you, Jan. This Slide 14 shows net sales for the most recent 5 quarters. Net sales amounted to SEK 206 million, which was 30% lower versus last year, excluding currency effect of 3%. There was effect of the corona pandemic as some customers have delayed certain projects, both large investments like in 5G and also upgrade projects.Next, Slide 15, starting with operating systems. As previously communicated, revenue continued to decline. The decline was 32%, mainly due to less sales from 2 key accounts, Ericsson and Nokia. That decrease is expected as they both are, since a few years, building their solutions based on open-source software.Network Solutions, by far, the largest product group now, representing 2/3 of total sales, decreased by 11%, driven by some customers delayed certain projects, both large and small.Software Development Services, previously named Global Services, declined by 16%, mainly due to less sales in the U.S. driven by the declining customer segments being more affected by the pandemic than others. This quarter, it's even more evident than before as we transform the business from a large dependency on operating systems some years back to a company, where we have a wide range of high-quality offerings in the Network Solutions.The operating segments, we now have a top 1 or top tier position. This is also guidance for us that we are exploring nonorganic growth opportunities.On Slide 16, we present the EBIT development. EBIT margin was 23% in the third quarter, excluding nonrecurring items, which is clearly above 20%, which is our objective. Comparing the third quarter this year versus last year, the margin was positively affected by lower OpEx and negatively affected by lower gross margin.Starting with the gross margin, we have specified the gross margin bridge in this slide. Taking out currency effect on working capital and restructuring costs, the Q3 gross margin was 69.2% compared to 71.7% last year. The 2.5 percentage difference is mainly due to higher D&A related to last year's acquisitions.OpEx, excluding NRI of SEK 4 million decreased by SEK 17 million compared to the third quarter last year. We see effect of the implemented efficiency program in combination with a high level of our expense in projects being capitalized as we continue to see progress in our promising development portfolio.EPS for the quarter was SEK 1.44, negatively impacted by the lower EBIT, but positively affected by lower financing cost.I'm turning to the next slide. We continue to generate good cash flows. The operating cash flow amounted to SEK 68 million, same as the second quarter despite a lower EBIT. We have now in place a very efficient financing structure, the low financing cost and net debt-of-EBITDA of 0.43. Even if we add the recent financing, 1st October of Aptilo, there's still a significant headroom for potential acquisitions going forward. The strong balance sheet is also reflected in the equity-to-assets ratio, which increased to 70% from 59% previous year.To conclude, we have a very solid financial position, making it possible to invest in both nonorganic opportunities and our organic growth projects.Back to Jan.

[Jan Häglund, President & CEO]

Thank you, Björn. Well, let me just wrap up on Page 19 by saying that this year, we -- there is no doubt that there is an increased uncertainty, both short-term and medium-term due to the pandemic. And while we maintain and deliver on our target on an operating margin above 20%, we see clearly that there are consequences on our sales, negative impact from the corona pandemic.Having said that, we continue to have a positive outlook for software and in telecom and enterprise networks. We see that these areas are more important probably than ever for people, businesses and society. And with the investments that we're doing for future growth, both in own development and also recently in acquisition, we believe that we are well positioned for the future.So with that, I thank everyone for listening. I give it back to the operator for possible questions.

[Operator]

[Operator Instructions] Our first question is from Simon Granath from ABG.

[Simon Granath, Research Analyst]

Perhaps starting off, do you consider that you now have better visibility on market activity compared with a couple of quarters ago, mainly in terms of the 5G rollout?

[Jan Häglund, President & CEO]

Thank you, Simon. Yes, I think we have good visibility on the market. But having said that, as we suspected a few quarters ago that there would be delays, we have seen those delays on the market. And I can only continue to estimate that we will see continued effects on the market as long as the corona pandemic impacts our customers, the countries, et cetera. And as we all know, it's not over yet. So I think there is continued uncertainty, and we will see -- we will continue to see uncertainty and possibly delays, also both in small and large investments in the market.

[Simon Granath, Research Analyst]

Okay. Fair enough. And you mentioned in your report that you have made some cost reduction in the -- in your U.S. operations. Are those cost reductions sustainable going forward? Or how should we think around those?

[Jan Häglund, President & CEO]

Yes. We took that decision quite early during the year because we saw that some of our customers are in industries that are heavily affected, for example, aviation industry, so we took measures for those, and those cost reductions are sustainable going forward.

[Simon Granath, Research Analyst]

Okay. So those cost reductions mentioned in the report, they relate to the initial cost reduction program that you mentioned in conjunction with the Q1 report?

[Jan Häglund, President & CEO]

Well, it's actually both. I mean we -- in the Q1 report, as you mentioned, we announced some cost reductions, mainly taking out synergies from the company. And that was initiated even before the corona pandemic struck, but we benefit from that more efficient cost structure now. On top of that, we took decisions and when we saw the corona pandemic strike, for example, in the U.S., where we saw customers being affected and then we did additional cost measures, but we were able to do that without significant restructuring cost.

[Simon Granath, Research Analyst]

Okay. Perfect. Just a final question. Also I've followed -- any efforts and I remember that ahead of 2020, you guided for increased investments. How would you say that these activities have progressed throughout the year? I know, for instance, that R&D costs have decreased somewhat quarter-on-quarter here, and would you say that the previously mentioned investments have reached their peak for now? Or could they increase further?

[Jan Häglund, President & CEO]

That is correct that we decided to increase investments in some areas, in particular, data management and our Stratum product, in particular, where we also, thanks to that, we're able to announce quite significant and strategic customer contracts. We continue to keep up those investments. Some of the effects that you've seen here are partly due to just taking out synergies, so maintaining the capacity, maintaining the focus, but just doing it in a more efficient way. And partly, with also the mix between what we capitalize and what we expend in terms of R&D, which is more a sign of that we invest more for the future.

[Operator]

Next question is from Viktor Westman from Redeye.

[Viktor Westman, Analyst]

I was first wondering about the software upgrades you mentioned that have been delayed from the customers. Can you say something about what kind of upgrades that are particularly delayed? Are there any patterns there?

[Jan Häglund, President & CEO]

Thank you, Viktor. It's not any particular pattern. It's just to show what we have talked about previously that, in some cases, customers have planned to upgrade for, for example, for new features or for more capacity. And we have cases where some of those upgrades are delayed either into coming quarters or into next year for practical reasons, not because of difficulties or possibly because there is a higher sort of financial pressure also in general in the industry. So we just wanted to highlight that it's not just the big flagship activities like 5G, which are very visible, but it can also be smaller activities that impact our financial results as long as the corona pandemic continue to have an effect on our customers, both operation and willing to -- willingness to invest.

[Viktor Westman, Analyst]

Right. And I saw you mentioned also increased uncertainty in the medium-term from the -- and can you quantify what you mean by medium term? Are we talking 2 years or any idea?

[Jan Häglund, President & CEO]

I don't think we put the numbers out. We say the same thing as we've been saying actually since the pandemic started. So I mean, short term, it's probably right now, medium-term would be probably coming quarter, coming year. That's how I would think about that. But it's -- I think we all know that the economy and some of the operations is affected by the corona pandemic, and exactly how quickly that will bounce back, it's difficult to say, and it's probably going to be difficult for difficult -- or different for branches and industries also.

[Viktor Westman, Analyst]

Okay. Good. So maybe it's just me who's thinking that medium-term is several years, so that's good to hear. I have a question also about Aptilo. You mentioned that IoT solutions are especially promising. Can you say something more about why you think that is?

[Jan Häglund, President & CEO]

Well, IoT is something that has gained traction and is gaining traction step-by-step on the market, I think we can all look around ourselves and see that more and more of things or devices are being connected, which has benefits either to us as people, but also to industries where you can actually automate more. In order to get that wireless connectivity is very important. And that can be either wireless connectivity through cellular systems, if you have the devices which are out in the field, for example, but in many cases, devices are also in short range, they could be in households or an enterprise or in stationary or semi-stationary places, and our Wi-Fi technology is actually the dominating access technology. So I think many other listing companies are predicting the continued growth for the amount of connected devices. And with the acquisition of Aptilo, our intention then is to provide solutions where we can benefit from that growth of connected devices step-by-step.

[Viktor Westman, Analyst]

Okay. And just the last one from me. I know there was a large CPE project in the U.S. rather recently. Can you say something how you are positioned in larger CPE projects? Is this an area where you can play or want to play?

[Jan Häglund, President & CEO]

So I'm not sure what project you're referring to now, Viktor. But I mean, our strategy is to deliver innovative solutions into tomorrow's CPE solutions, in particular, something called universal CPE, which are then based on virtualization technology where you can choose basically any hardware and you can have any kind of application. And that's where our software fits into the middle. It's kind of the middle where our product is called NFV Access and we enable that kind of ecosystem and choice for hardware and software. Many people refer to this as the kind of second-generation of CPEs, and there are projects ongoing in different parts of the world for deploying this kind of universal CPE-based technology.

[Operator]

[Operator Instructions] And there are currently no further questions registered. I'll hand back to the speakers. Please go ahead.

[Jan Häglund, President & CEO]

Thank you, operator. So we'd just like to thank, everyone, for listening and just restating that while we have a year where the corona pandemic is affecting our business as we have suspected and highlighted since the beginning of it, we're happy to see that we've been able to maintain our margin ambition. We've done that, thanks to hard work, early decisions and, of course, a healthy underlying business, but we also maintain an optimistic view going forward. We continue to invest for the future. We believe that we're well positioned in areas like 5G, virtualization, cybersecurity, and with the latest addition now, the acquisition of Aptilo, we add into an area, which is very complementary to us, both in terms of the technology and customer footprint. So based on that, we are -- we continue to maintain a positive long-term outlook of our market.So again, thank you very much for listening.

[Operator]

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