Enea AB

STO:ENEA

Earnings Call Transcript 2024-Q3

[Operator]

Welcome to the Enea Q3 presentation for 2024. [Operator Instructions]



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

[Anders Lidbeck, executive]

Thank you so much. Good morning everyone, and thank you for giving me this opportunity to walk you through our Q3 numbers. We will follow the agenda that we normally follow in these calls, short intro to the company, discuss our financial results and then discuss way forward and outlook.



With me here, I have Ulf Stigberg, our CFO, and he will take you through the financial numbers. So he will speak a bit later. But let me start by discussing where we are now as a company. So the vision of Enea is to make the world's communications safer and more efficient. And that's a vision very much shaped by the journey we've been on for the last many years. Especially, what happened in the last 10 years has added a lot of capabilities and skills to the company, especially when it comes to telecom application and cybersecurity software.



That has formed a unique cybersecurity and telecom portfolio that is unparalleled anywhere else, and this is what is underscoring the opportunities we have to reach that vision over the years to come. But not only is this a unique portfolio, it's also a world-leading portfolio. In traffic management, for example, we are the traffic management product that is running in the fastest network in Canada, the fastest network in Italy. And our customer in Argentina can show a 30% additional video capacity using our products.



Lots of innovations, lots of firsts. And lately, we're also adding AI-based traffic congestion management to this product. It's deployed in 50 large-scale operators around the world, and we're optimizing around 1 billion-plus subscribers daily, optimizing their video usage or their video experience.



We're also a leader in cybersecurity. Here, we have some 90 operators and aggregators around the world and we are processing some 3 billion messages a day and protecting some 1.5 billion subscribers and their devices around the world. Also here, we have a lot of innovation, and we've been in this market for a long time in our operation in Ireland and in Paris.



What's very satisfying to say today is that we have double-digit growth in the core areas. And the 2 products I just discussed represents those 2 areas. We have more products in those areas, but they are representing the key growth drivers for us. We've always said that we are aiming for double-digit growth in our focused areas. And if you look at the 9 months of 2024, we have achieved 11% organic growth in these business areas. 13% in the security business and 9% in the network business.



Another product we have in our network portfolio is our Stratum product. That's a product that's been in the news many times over the last 18 months. It's not the product where we have the most customers, even though we're managing some 150 million subscribers in the older generation of this product. But why it's worth mentioning today is that we, at the beginning of Q4, signed the biggest contract in a long time, probably one of the biggest or if not the biggest contract in the Enea history, and that's a USD 17.7 million contract with a potential value of USD 21 million over the coming 3 years.



And that said, the support and maintenance is not yet agreed. So that will come on top of this contract. It's an amazing contract for Enea, and it's an amazing contract for the product. It's mostly recurring software and software licenses and services that will be recognized during the period. $0.7 million will be recognized in Q4, but this is mainly a '25, '26, '27 deal.



I think it's underscoring the quality and the interest the market is showing in this product for us. It's also a product full of innovative features. And the most important thing is that it is a 5G UDR product that solves the problem of vendor lock-in. So it opens up the network for many different applications, which was the original thought when you architected 3G. But the good thing here and the main takeaway from this slide is the record deal that we closed beginning of Q4, and we press released only some days ago.



With that, I would like to handover to Ulf, to take us through the financial results.

[Ulf Stigberg, executive]

Thank you, Anders. In Q3, we report an organic growth of 3%. The unadjusted figures is in line with the previous year. In total, we had a lot more higher software license sales in Q3 compared to last year. And the total revenues for the quarter is SEK 217 million compared to last year, SEK 221 million.



Looking at the Security Solutions area, we have a strong license revenues up 67% year-on-year, driven by upgrade and expansions and a stable base of recurring license revenues. This forms a very stable base for our revenues to come. We have some variations in professional service based on project milestones and that varies over time. And we have a support and maintenance area where we increased with 4% year-on-year. And this is driven by a stable customer base and also as a result of higher license installed base.



Looking into the Network Solutions, compared to last year, we have a reduction in license deals, and this is based on the which was on a different level this year. We also have some variations in professional service revenues related to ongoing projects and ongoing milestones. We have a stable support and maintenance base increasing with 2% compared to last year.



The EBITA margin was reported at SEK 71.8 million. This is at 33% compared to last year, 34%. Unadjusted also 33% compared to last year, 32%. The gross margin is slightly higher compared to last year, and this is driven basically by higher share of license revenues in the product mix.

Our operational expenses has decreased with a few millions and partly driven by a lower depreciation and amortization figure. This is as a result of lower after the write-down last year. So we have less depreciation schedules. The operational expenses, excluding the D&A is in line with last year. It's a combination of slightly higher spend and slightly higher capitalization of R&D investments.

During the quarter, we have experienced a change in currency development, and this impacts our financial numbers. Profit before tax was impacted by a negative financial net, and this is related to unrealized currency adjustments on cash balances in the group. During the quarter, we experienced some stronger Swedish krona, which had these effects on our balance sheet. If you look over the 9-months period, we are actually in line with the same financial net reported. So for this quarter, we had a quite negative but over 9 months, we are in line with last year.

Something I would like to brought up also is two comments on the balance sheet. With regards to intangible assets, we have a policy with the capitalization of R&D expenses. And during a period up until quarter 2 last year, we had a growth in our balance sheet on the net book value of capitalized R&D. After the write-off, we are in a situation where we actually are in balance, which means that we're not growing our balance sheet on the capitalized R&D, which makes lower stress on our valuations.

On the right side, a comment on the current receivables. Our cash flow for the quarter was a little bit lower than maybe expected, but this is related partly to the currency effect, but also related to a buildup of working capital in accounts receivable and accrued revenue, and this relates to the new projects we have started off this quarter and the previous quarters. With improved processes and focus, we will improve these accounts receivable and accrued revenue going forward.

This both effects on currency and working capital results in a cash flow from operations at SEK 18.6 million compared to last year where we had a really good cash flow for that quarter. In total, net cash flow for the quarter was minus SEK 27 million compared to plus SEK 50 million last year, and the net debt for the quarter is SEK 170 million compared to SEK 146.7 million last year. Equity ratio at 66.5% and the net debt to EBITDA, 0.58. And for the quarter, we have continued with the buyback program, and we have purchased 204,584 shares to a total consideration of SEK 7.3 million. And this program continues in Q4.

[Anders Lidbeck, executive]

Thank you so much, Ulf. So let me then walk you through our view at our business going forward. Let me start with this. So we had 3% organic growth in the quarter. We had 6% organic growth in our focused areas in the quarter, and we have 11% growth in our focus areas for the first 9 months.

Growth is key to Enea and key to our future success, and we're working hard every day to achieve growth. And we look at it from 3 different perspectives. So to begin with, we call the day-to-day work in our R&D organization, in our sales and marketing organization with our today's customer enhance. That means that we're trying to improve or also improving the existing offering with new features based on customer feedback, market feedback and our own views on how to enhance the products we have today. That's the bread and butter. That's the basis for our growth operation.

On top of that, we call the next step expand. With that, we mean to try to move into adjacent areas with broadening the addressable market by adding features to the product, sometimes adding new products based on the existing portfolio that we have. You can look at the SDTDK product that we launched in 2023 that has created new logos, new wins for us this year. You can look at the DPI functionality we're adding to our traffic management offering that has generated 2 new deals for us in Q3. So that's a very important area to our growth strategy.

Evolve means take our portfolio and add new offerings to it. And here, we're looking quite intensively at the moment at new disruptive technologies like AI. AI is not something that we're only adding to our product portfolio and to our offering, we're also adding it to how we develop the offering and how we run our operation. But the evolve stage for us is actually adding new disruptive capabilities to our offering.

But to fuel growth, we're also working in the discussion on how to improve things like the global fight on cyber threats. Here, we are active in very many places around the world. During the quarter, we've been at 10 events talking about this. We've been in Paris, Geneva, Indonesia, Brazil and many more. We talked about things like how RCS, Rich Communication Services now adopted also by Apple, even if no one at this point in time know how long it will take until it's fully implemented, but how that will impact cybersecurity threats. We talked about voice security, and we talked about security in the ever-growing Internet of Things.

We've also, during the last 3 months, been acknowledged by 3 reports from Tier 1 industry analysts and also this on cybersecurity, but also on how to make their networks more efficient. But cybersecurity is very interesting. This slide, we can certainly view from 2 different perspectives. The most obvious perspective is the threat and the cost of cybercrime to society. On the left side of the screen here, you have a report from FBI showing the types of crimes that are sent into their complaints center.

And the cybersecurity-related crimes, so phishing or spoofing or voice and messaging type of crimes, it's a multiple higher than the #2 crime. So, it's an enormous rate that the cybercrimes has been growing over the last couple of years.

If you look at the right side of the screen, you see something that was presented at the World Economic Forum beginning of this year. And if you look at the cost to society, here, we're talking USD 1 trillion. The growth from the USD 7 trillion cost in 2022 is expected to double until 2028. And the cost in 2028 is almost USD 14 trillion. So that's obviously the first approach and the first thought when you look at this slide. The flip side is, of course, from an Enea perspective, that this opens enormous market opportunities for us. Both the operators, which is our prime customers, but also the pressure on our customers from individuals, the subscribers and from government and society to improve the network and make it more difficult to commit these cybercrimes. From an Enea perspective, this is a huge market opportunity.

This is also why we can be comfortable in, again, reiterating our long-term ambition to generate double-digit growth in our focused business areas. We have, for the first 9 months, what is sometimes referred as the Rule of 40. We're well above that Rule of 40 with 33% EBITDA margin and 11% growth. But we're still working in a challenging market from a macro perspective, and we are, therefore, reiterating the same guidance for 2024 as we've had throughout the year, and that is that we will achieve an EBITDA margin above 30%, and we will do that with strong cash flows.

I would like to end this presentation by inviting the professional investors to Capital Markets Day in Stockholm December 4 in the afternoon. Here, we will discuss all the things that we've talked about today and more importantly, maybe in more detail than we've been able to do during this 30-minutes call.

So, with that, I would like to thank you for listening and invite any questions that might be out there.

[Operator]

[Operator Instructions] There are no more questions from the telephones. So, I hand the conference back to the speakers for any written questions and closing comments.

[Anders Lidbeck, executive]

Thank you for that. We have one written question in front of us here, and that is if we could comment on the service potential on the contract announced recently.

And I assume it's -- you mentioned the -- you're referring to the contract on our UDR product. And that contract is actually already framing the services business on that software during the coming 3 years. So, it's a recurring license business, and it's a committed software services volume for the coming 3 years. That is the contract.

So, on top of that, you should not expect any more services. So, the USD 17 million or the USD 18 million with a potential USD 21 million, that's the scope of the contract. What will come on top of this is the support and maintenance. which is obviously a smaller part than this. But as you might imagine, for us, the biggest contract in the history of Enea or at least in the last decade is a very good thing for us.

Okay. Thank you for that. I hope that answered the question. I see no other questions on the screen in front of me. And if there are no other questions from the conference?

[Operator]

There are no more questions from the telephones.

[Anders Lidbeck, executive]

We just caught another question here on the screen. Comment on our pipeline we have in Enea in months.

Bigger possible losing in the software industry is more or less than difference almost -- pipeline and that's coming up back a bit and the -- so that's the [indiscernible] of the question. Thank you very much, and goodbye.