Enea AB

STO:ENEA

Earnings Call Transcript 2017-Q4

[Anders Lidbeck, President & CEO]

So thank you very much, and thank you for giving me this opportunity to walk you through our '17 numbers, Q4 '17 and full year '17.I will follow the normal agenda. A short intro to the company, the financials, and I will talk about the transformation we're going through. And then look at our way forward. So going through the introduction, I think you know this by now, but this slide is actually updated with 2017 numbers. So we're a little shy of SEK 600 million in revenues. Our operating margin is 23%. We don't spend nowadays as much in R&D as the operating margin, so the R&D investment is 17%, which still is a lot than of course the growth in absolute numbers. And headquarters [indiscernible] acquisition in Paris, and 463 employees by year-end. We're in the network, our software and expertise it served our customers' need to enable today through tomorrow's connected society. Our vision is that our software and expertise will help you develop amazing functions in a connected society. And our commitment to the market is that we will work in the open source community, not only as silent members, but as key contributors to develop and harden optimal software solutions for tomorrow's connected society, i.e. our software offering today is very much based on the open-source trend, and we are part of hardening that open source so that it can work in production networks. 3 billion people rely on our software every day. Most of you are probably using Enea software or relying on Enea software to be connected to this phone. I'm certainly relying on Enea software to connect to this phone. And the reason for that is that the huge success of our 2 main customers in the telecom space, Nokia and Ericsson. Together, they have a large market share in 3G, 4G and some 5G networks. But also, if you would buy Volvo trucks, you might have Enea software. If you would buy Electrolux vacuum cleaners, there might be Enea software inside. So the success of our customers is really important for the success of Enea. If we now walk into the Q4 numbers, and we start with operating profits, we have a record operating profit in the quarter. Never before have we had north of SEK 40 million in operating profits as we did in Q4 '17 that topped over Q4 '16 when we had SEK 34.6 million, and that's a operating margin of 26.6%, which is, again, an operating margin that we never have had before. And you can see this trend on the right-hand side of the slide. Now we did take a quite big nonrecurring hit in the quarter. So after nonrecurring costs of SEK 17 million, the profit in the quarter was still SEK 23.5 million, which is very solid given that nonrecurring cost. So if -- let me talk a little bit about nonrecurring cost on the next slide. So after the year ended, in January this year 2018, the arbitration award in the dispute that we've mentioned now for a couple of years, was issued. And that ruling meant that we had to take a majority of the counterpart's expenses. So we had to charge Q4 with an additional SEK 16.4 million of nonrecurring cost while the total net impact of nonrecurring cost in Q4 was only SEK 17.1 million. So that tells you that we've had the normal nonrecurring cost that we thought, when we went into the quarter, we would also have had an improved operating margin in the quarter after taking in the nonrecurring cost. But when loading it with the SEK 16.4 million, the result is what I just talked about in the slide before. So this ruling implies that additional royalties will come for us for deliveries that the customer has not paid for since 2004, but it's too early to discuss and specify any amount, so none of that effect is taken into the '17 books. For the year, we have now -- or we had SEK 31.7 million in nonrecurring costs, of which SEK 26.7 million represent legal fees. So the cost of running this process for the year has caused us SEK 26.7 million. So that's why I'm really pleased with also the full year operating profit. First of all, before nonrecurring costs, we have a record operating profit. It's an all-time high. And an 11% growth over '16. So the total profit is SEK 135.4 million. That's a 23% operating margin. And if you remember, when we went into 2017, we said that by the end of the year, we'll again reach 20% operating margin. But now, for the full year, we reached 23%. The ones that listen into the call after Q3 might say -- might remember that I said that the record margins we had in Q3 will be hard to sustain going into Q4. But now, we actually increased the Q4 margins over Q3. So I'm really pleased with the 23% in operating margin. I'm actually also very pleased with SEK 103.7 million of profit also taking all the nonrecurring costs that we had to add to the 2017 results. And from a profit perspective, this was a very good year. We also had record revenues and record revenue growth. In the quarter, we had 13% revenue growth, and adjusted for currency, it would've been 15% revenue growth. And that can be compared with 5% Q4 last year. And on a full-year basis, we had 18% revenue growth. And this is the 14th consecutive quarter with year-over-year revenue growth. And that's of course really positive for us. Moving into breaking revenues on geographies. We had a really good quarter in the U.S., both -- or mainly in software sales in the U.S., but we also had stabilization in our Global Services in the U.S. The U.S. represents, or the Americas represents 30% of our business, and we've had some issues throughout the year in services. I will come back to that in a minute. But it's obviously a positive that we have such a strong growth number in the quarter. But it would also be correct to say that this is [ through ] the variations and there is north of 35% growth year-over-year '17 over '16 in the U.S. It's just quarterly effect based on some rules that we did in the U.S. This is a combination of good performance in the Qosmos business unit as well as in the operating system operations in the U.S. So good news in the U.S. Also in Europe, we had growth, but we had a more moderate growth with 6% year-over-year. And here, also the Global Services organization have been more stable throughout the year, so -- also in Q4. And we have had solid developments both from software and services in Europe. In Asia, revenues were more or less flat, 2% growth. In Asia, we don't have any services operation, but we do have a piece coming from the Qosmos acquisition and a piece coming from the old Enea, and both have developed well in Asia in Q4. On Slide 14, we break revenues on product groups. And then if you look at operating systems, which is the largest piece, we had a small decline in the quarter compared to the same quarter last year. And this is the product group that we're selling -- the major product group going into the Key Accounts. If I look at the Network Solutions, that increased significantly in the quarter and represents 33% of our business. This is part of the transformation we're going through, and I'll come back to that in the end of the presentation. But this is one of the major things that happened during 2017. It comes with the acquisition of Qosmos. I'm really pleased how this acquisition have played out during 2017. Global Services increased actually in the quarter, which is very good news. It represents 22% of our total sales in the quarter, which is also very good news. It's a small number compared to the 30% that it sometimes have been, but it is also one of the reasons that our gross margin is improving. So if we then move into Global Services. So Global Services increased in the quarter, and if it says anything else on your slide, that is wrong. We have a growth in the Global Services. Year-over-year, though, we have a decline. And as I said, after Q3, we expected this and we saw this coming, because we had a better pipeline going into Q4 than going into other quarters. But also, the comparables the quarter before makes growth easier in Q4 '17 than in the other quarters of '17. You can see that -- when you look at the right hand of this slide, it was actually in the drop in Q4. After the U.S. elections, we had a significant drop in our revenues, and that was because at the time, we thought it was because of the turbulence. That was what the customers told us and that was what the organization told us. But that has since stabilized on lower levels. It hasn't gone down, but it hasn't gone up significantly either. But now, it's growth over the same period last year. And looking into 2018, we do expect the services organization to come back to growth. But still, this is -- with some caution, I'm saying this because there's still not stable development in the U.S. in our Global Services operations. Still that -- this represents 22% of our total business and a very small portion of our total profit. It's good news from a margin perspective and from a profit margin perspective, because the gross margin we have in our software business is obviously much stronger than the gross margin we have in our services business. But the services business is important for us to roll out big projects, and it gives us a good footprint in the U.S. and in Europe, both with existing accounts, but also with new accounts. We have more [indiscernible] industry growing with this operation of ours and there is a lot of expectations embedded in there. But all in all, we're at 22% of our total sales. This is one of the reasons that our gross margin and our bottom line margin is actually growing. That takes me into the strategic transformation that we're going through, and that takes me into Slide 17 in a natural way, which is a really interesting slide. From an investment perspective and from looking at Enea, one should really keep this in mind. So the 22% of services in the quarter is 23% on a yearly basis. And you can see a huge difference in the revenue mix on accounts that -- on the different businesses that we have gone through since full year '13 to full year '17. So we have seen a constant decline of our percentage with Key Accounts.Now in the quarter, Key Accounts actually grew with 3% year-over-year, and if it says something else on the slide earlier, that's not correct. The growth of Key Accounts in absolute numbers in Q4 is 3%. But as a percentage of total, it's going down. Global Services, we have said it should be south of 30%; but in the range 20% to 30%, we think that Global Services is good. And where we're growing our operation is in what we call Worldwide Software Sales. And here, we had 82% of growth year-over-year in Q4. And this is obviously -- a big portion of that is coming from the acquisition of Qosmos that we did December 2016, but there's also growth in the existing or in the prior Enea worldwide sales operations. But also, managing this transformation with improved, not only top line, but also improved gross margin and improved bottom line, it's actually something that one should consider when looking at this record top line and bottom line numbers we have. Because the gross margin is indeed highest in Key Accounts, second highest in worldwide sales, and third highest in Global Services. So it is a built-in challenge for us to improve the percentage of Worldwide Software Sales, and at the same time, improve the gross margin and our bottom line margins. But that is what have happened. And that is what has happened. We're really pleased with this. Obviously I showed this slide last time, but it's not only about improving bottom line margins, we're also significantly investing in our product portfolio and -- at the same time. And during the last 2 years we've had 3 new moving up-- developed 3 new product areas. One, is from organic product development, the network and device management area; from the acquisition of Qosmos, the network intelligence area; and from our own organic product development, network virtualization. Now the good thing or the good news is that Qosmos in itself, before we did acquisition, also invested in network virtualization. And from the acquisition, we've taken product and expertise and embedded that in our network virtualization areas. So going into 2018, it's a combination of Qosmos expert services and products and Enea services and products that is forming our network virtualization offerings. Also in network management, coming from the smaller acquisition we did 2 years ago now of a product called ElementCenter and our own On-Device Management product development that we've done for many years now that is forming the network management offering. And you will also see over the next couple of quarters that network virtualization and network management will come together as one offering from Enea, and it's already happening. During the quarter, we strengthened our partnerships. Partners is very important for Enea. Always have been, and probably always will be because our software, obviously, both the operating software works directly on the hardware, and our DPI software is embedded in the hardware. This is just 2 snapshots from what's happened in the quarter. We have a Taiwanese partner called Lanner. And they announced -- they build hardware. They announced NFV-ready network platforms for vCPE and Telco Clouds. And then those products are launched with Enea software side-by-side with [indiscernible] Intel software. Also with the Swedish company, Clavister, we entered a partnership or we strengthened the partnership. And Clavister is actually integrating their software on top of our OPNFV platform -- so our OPNFV software platform. We continue to work very -- to stand side-by-side with ARM. And so in Q4, these are 2 examples, both from Japan at the ARM Tech Symposia. We work together with ARM. We had a booth together with ARM. And in the -- and the technology in Japan, we had a speaking session together with ARM. But I would just quickly also want to say that we remain an independent software vendor. ARM is a key partner for Enea, but we also work with Intel. Intel is the main player to date, especially in network function virtualization. And we make sure that our software not only run on ARM platforms, but run as well on Intel platforms. So it's really important for us, and it's really an important message for us to win the customer with our offerings. And really, just the last point here. So we invest a lot in NFV. NFV, obviously, not only for Enea, but for the telecom world, it's where lots of investments are going now. But for us, our OS technology as well as our DPI technology is where all the profits are coming from, but we're using to invest in new products. And therefore, we continue to invest quite a lot, not only in product development, but also in marketing activities that help in [indiscernible] in DPI. So where does this take us? I'm now at way forward and outlook. And let me start on Slide 23 with assessing the 2017 targets. So going into 2017, we said that we are -- our mission for the year was to achieve double-digit revenue growth and improved operating profits compared to 2016. In Q2, we added before nonrecurring costs, because we took a restructuring program in Q2, and we had some increasing labor costs, and we had before nonrecurring cost. These 2 targets we did achieve with an 18% revenue growth and with operating profit of SEK 135.4 million, which is an 11% improvement over 2016. So obviously, we're really pleased with that. We are also pleased with the strong financial position in the quarter. We have SEK 18 million in operating cash flow. And for the year, we had SEK 116.6 million in cash flows. The cash and cash equivalents and financial investments at the end of the quarter, so at the end of 2017, is now SEK 414.3 million, and that should be compared with SEK 223.5 million at the end of 2016. The total interest-bearing liabilities are SEK 116 million, and it's the same as the year-ago. And that is, of course, what we used to do, the Qosmos acquisition.So the net cash position is close to SEK 193 million, which should be compared to a negative SEK 125 million a year ago. And the equity ratio is up to 60 -- almost 65%. So the financial position is strong, which lead us to dividend. So with the strong -- or strong financial position, it's really important for us to further this transformation that we're doing, to further or to lessen a bit the dependence that we have on Key Accounts and to continue to grow a stronger company with a larger footprint around the world. Acquisition is important. And to be able to do these acquisitions, we not only need a strong financial position, but we also need a flexible financial position or a flexible capital structure. So this means like we did 12 months ago, that we can be in debt from time to time. So in line with days and in line with what we have said the last 24 months, we have also -- or the board has decided to adjust dividend policy. And to add the second sentence that consideration should be given to the company's financial position cash flow acquisition opportunities and for future prospects when deciding on dividend. And as a consequence of that, the board have decided not to recommend at the Annual Shareholders' Meeting, a dividend for 2017 but to instead use the strong financial position to further market position through investments in product development and investments in potential acquisitions. The market outlook for this year is that we want to grow the company. Our ambition is to achieve revenue growth over 2017. And we want to also do improve operating profits. So we will continue with this ambition to bolster revenues and grow operating profits compared to the year before. And we note that we see that this operating profit improvements are expected to occur in the second half of 2018. So with that, I would like to thank you and open up for potential questions.

[Operator]

[Operators Instructions] And we have one question so far. That's from Viktor Westman of Redeye.

[Viktor Westman, Analyst]

You mentioned in the CEO statement that earnings growth in 2018, you expect it to be -- to come mostly in the second half of the year. Is there any specific reason for that? I noticed you have very weaker compare versus in H2 with H1 2017.

[Anders Lidbeck, President & CEO]

Yes. So there are really no specific reasons other than that we're continuing to work on the integration of the Qosmos acquisition we launched in the organization going into 2018 to further focus the operation on NFV, on OS and on DPI and on Global Services. We see that, that operation could -- that organization could take a few quarters to be fully efficient and for us to see the full synergies of that, the full effects of that. We also think that -- we see that the Global Services will need some time to stabilize. So when we try to guide the market, just make note that we see that its improvement will come at the end of the second half of the year.

[Viktor Westman, Analyst]

Okay, great. One follow up there. You also mentioned in the quarter that Qosmos was adding to the margins at the end of the year. Do you mean in December month or the whole Q4?

[Anders Lidbeck, President & CEO]

Well, I -- so when we acquired Qosmos -- in 2017, Qosmos made losses. And going into 2017, we adapted some changes both in applying IFRS on the Qosmos books and taking out some cost in the Qosmos operation going into '17. We said the ambition was to significantly improve margins in the Qosmos operation. But obviously, going into 2017, I couldn't be sure that we're going to be so successful in improving margins in Qosmos or that the Qosmos management team will be so successful. But at the end of this year, in Q4, the Qosmos -- the Qosmos operations is the second most profitable operation in Enea from a margin perspective. So operating margins in the Qosmos operation is way below -- way above 20%. So I mean that the operating margins from the Qosmos operation in Q4 is north of 20%.

[Operator]

[Operator Instructions] Okay. As there are no further questions at this time, I'll hand it back to our CEO for the closing comments.

[Anders Lidbeck, President & CEO]

Okay. Thank you very much. And once again thank you for giving me this opportunity to walk you through our numbers. And hope to talk to you all again after our Q1 -- after Q1 and with our Q1 numbers. So thank you very much.