Enea AB

STO:ENEA

Earnings Call Transcript 2018-Q4

[Operator]

Ladies and gentlemen, welcome to the Enea AB Q4 Report 2018. Today, I am pleased to present CEO, Anders Lidbeck. [Operator Instructions] Speaker, please begin your meeting.

[Anders Lidbeck, President & CEO]

Thank you very much, and good morning, everyone, and thank you for this opportunity to walk you through our Q4 numbers and full year '18 numbers. On Slide #2, I have the agenda. As always, I'll give a short intro to the company, then walk you through the financials, the -- and top line, bottom line, primarily, and then discuss the way forward in an outlook for 2019. So that takes me to Slide #3, the intro. And quickly on to Slide #4, our business card. So the business card, this is a slide that we always have, obviously, changed a bit. We have updated it with the latest numbers, and you can now see that the company's revenue is SEK 830 million for full year '18, so roughly $100 million, which is a key number for us, operating with a big part of our operations in the U.S., with 571 employees at the end of the period. We did 23% operating margin during 2018, which is actually margin expansion compared to 2017. So we were very pleased with that, and we have 25% operating margin, excluding nonrecurring items in Q4, which is also a very strong number for us. We have a big portion of our revenues invested in R&D, 16%, and that is payable over the year and as well in Q4 then. I just wanted to show you this slide because it has, obviously, changed during the year. So we now have an even bigger presence around the globe with a quite sizable operation in Redwood City in California, Silicon Valley. And as well, a growing operation in Asia with offices now -- sizable office we're building up in Pune in India, relocating or co-locating our people in Japan in the Tokyo office, and then in Shanghai, in China and in Singapore. We're also building the significant R&D facility in Northern Ireland, in Belfast. And -- so it's becoming very much a global business, as we've been for a long time. But it's increased during this period. So on Slide 6, I just want to remind you that, probably, you're now relying on Enea software. If you have connected this call online, you would probably be relying on an Enea software somewhere in the connection as 3 billion people do every day when they connect to -- when they connect online with their mobile phones. And on Slide 7, clearly, even as we're bigger now, significantly bigger after 2018, we're still not big enough to claim this position by ourselves, and thanks to the successes of our customers that we have this reach to 3 billion people. And when it comes to the telecom network, obviously, predominantly, the Nokia and Ericsson successes that are taking us there. But with the new products we have, also the big telecom operators are in our customer base and as always, we have customers also outside. But 75%, 80% of our business is going to the telecom data combo market, but we call that the networking market. That takes us into the financials and to Slide #9. So I'll start with top line. And I am really pleased with the pattern you see on the left side of this slide, and if you compare that pattern with the good pattern in 2017 where we had year-over-year growth in every quarter, we had the seasonality with Q4 being the strongest. This has increased quite significant in 2018, with growth every quarter year-over-year during the year with a very typical and good seasonality and with a very strong Q4. So we had 66% revenue growth in the quarter. If we adjust that for currency, we had 49% top line growth and you can compare that with Q4 2017, and you see that there is a significant improvement in the growth rate. This is actually the highest growth rate we have on record in a quarter, and it's, obviously, the highest Q4 revenue on record in Enea. So it is a great top line development during the quarter and during the year. So we have 48% growth year-over-year. And if we adjust that for currency, we have 38% growth year-over-year. If you move to the next Slide #10, we can -- we start looking at the profit and the operating margin. And again, record quarterly operating profit, 49% operating profit growth, if we exclude nonrecurring items. And if I include nonrecurring items, and I compare the reported number in Q4 '17 and reported number in Q4 '18, that's actually 192% operating profit growth. But even though it's a fantastic number, I do think that one should look at the 49% operating profit growth because it's more apples-and-apples. If we look at the left side of the slide, it's actually even better pattern with EBIT growth quarter-over-quarter and a phenomenal pattern during the year. So we have the -- an operating margin of 25% in the quarter if you exclude nonrecurring items. And again, if you take the reported operating margin, it's actually 28%. But that's actually a little bit too positive. So again, I advise people to look at the 25% operating margin, which is a more fair number to size the business -- the profitability in Q4. Phenomenal earnings per share, obviously, where everything goes through, and we have the same phenomenal growth in EPS. So 192% EPS growth, and this is the highest EPS growth ever, if we exclude the capital gains and the EPS in Q1 '12. So a really good quarter from a profit perspective. If you look at the full year on Slide 11, again, a record operating profit. So record growth in Q4, record revenues in Q4, record revenues on the full year, record profits on the quarter and record profits on the full year. With a 43% operating profit growth, same pattern if you look at the reported numbers of 84% operating profit growth versus same with a 43% of operating profit growth. But here we will see a margin expansion. Even though we focus on growth in the company, we have margin expansion in 2018 over full year 2017. And we have the best EPS ever in history of Enea, with a 56% EPS growth at SEK 7.33 per share. On Slide 12, I think one of my favorite slides because this change in the business that is shown on this slide is something that we've been looking at and working on for the last couple of years, and that since I changed into the role of CEO. And, obviously, we've been seeing the revenues from our Key Accounts, the traditional Key Accounts in the company, going down and -- as a percentage of business, going down and actually wouldn't have been able to add revenues in what we call Worldwide Software Sales or Global Services, the total business would have gone down. So with Key Accounts coming down from 50% in Q4 '15 to 23% of total business in Q4 '18, and also, in absolute numbers coming down with 8% over Q4 '17, still we have tremendous growth in the company's total business, and we have tremendous EBIT growth in the total business and we have tremendous EPS growth in the total business. So we've really managed the decline of the Key Accounts, and not only secured the profitability we had before, but we have improved profitability significant during this period. And I find that a very important message to convey here, and it's a really shift in the Enea of 2018 than the Enea we had in 2015 or in 2010. We move to Slide 13. I just want to discuss for a few minutes the breakdown of revenues on geographies. I said that we have more and more significant operation or a growing operation in the Americas, so we have doubled up business over the same period last year. It now represents 42% of our total business. We have growth in there and, obviously, much of this increase relates to the acquisition of Openwave Mobility that we did March 2018. We have growth also in EMEA, over the year, obviously, and supported by the acquisitions we've made, and we have a doubling of our Asia business, again, much supported by the acquisition. But we now have 11% of our revenues coming from Asia, and to have that number above 10% and growing faster than the others geographies, is clearly something that is a long-term ambition for us going forward. So I'm happy with this revenue breakdown and how things have developed during the year. Next slide, Slide #14. We breakdown revenues on product -- or product areas. And also it's a new Enea, so all these records that we've done on profits and EPS, you can argue that top line is helped by the acquisitions. You can, of course, argue that the EBIT to some degree is helped by the acquisitions, even though, which requires that we have changed the profitability model that we had had in these acquisitions that one problem was actually loss-making when we acquired them, the other one did 10%. Now both of the major acquisitions are delivering over 20% operating margins. But that it so quickly, also, produces record EPS, that's something that I think is worth noting. So with these records -- or during -- we're producing these records, but we're also changing the company. And here we see a breakdown on revenues on product areas, as I said. And the company that we had in 2015 Q4, that had 60% of its revenues coming from operating system. Operating systems is the product area where -- on which this company has been operating for more than 25 years. But it's a product where we can't see much growth going forward. And that is the pattern that's been here since many years back now. Even though in Q4, we did see a little growth over Q4 '17, this is not the product area with the best growth prospects going forward. It's a very profitable business for us. It's a cash cow for the company, but it's not where we see the most growth. Therefore, it's really important to see that 55% of Q4 revenues comes from what we call Network Solutions. So by far the biggest area for Enea, but it's also the fastest-growing area. So the biggest area of the company that's representing 55% is also the fastest-growing area. During this period from Q4 '15 to Q4 '18, we've also seen Global Services going down from representing 30% of the business to now representing 15% of business. We had growth which -- we had growth of 3% organic in Global Services in Q4. So it's reasonably stable, but it's now representing 50%. And this shift in our product mix have significantly improved our margin and earnings capacity. And you can see that not only in operating margin and EPS, but you can already see that in our gross margin. And we have record gross margin in Q4 of 73.8% compared to 73.2% full year and compared to -- sorry, compared to 73% full year. Also in the quarter, we have 73% compared to 71% same period last year. All right. I now move to Slide 15, and we will talk a little bit about our financial position. So here again, very good cash flow compared to last year in the quarter, so we have the cash flow of SEK 42 million, which is double compared to the same period last year. On the year, we have a 50% increase of cash flow from operations compared to the same period last year. If we look at cash flow before changing working capital, we also have an almost tripling of the cash flow in the quarter and a doubling of the cash flow before changing working capital compared to 2017. We now have at the end of the period roughly SEK 75 million compared to SEK 300 million same period last year. Obviously, that is due to the current payments we did for the 2016 acquisition and the new software that we announced in December that we hope to be able to close here in March. So having paid those big tickets, cash and cash equivalents is down to SEK 75 million at the end of the period. That also have impacted the liabilities, and total interest-bearing liabilities at the end of the quarter is 300 -- sorry, SEK 634.2 million, which is, obviously, a big increase compared to the same period last year. And then you should know that after this, we took the bond, the bond that financed the Openwave acquisition that we did in March 2018. And the same thing here, the net debt position. We now have a net debt position of SEK 560 million, and that should be compared to the opposite in end of 2017 where we had instead SEK 196 million. This also changes the equity ratio. And the equity ratio is down from 64.3% to 51.4%. So then I think, the next slide is kind of already being explained by this. So we have a long-term dividend policy that at least 30% of the profit after tax will be transferred to shareholders. But the board should also consider the company's financial position, the cash flow and the acquisition opportunities and future prospects. And in line with this and the acquisition and future prospects that we're looking at, we, the board, will not propose any dividend for 2018. That takes me to the way forward and outlook. And if we jump to Slide 18, last year we celebrated our 50 years anniversary. So Enea was founded in 1968 by 4 students from the Royal Institute of Technology in Sweden, and we've been working, obviously, ever since. And some people that were with the company today started during the '80s and were part of launching our operating system, mid-'80s, and part of having this operating system making its breakthrough in the beginning of this millennium. So what we did in -- I came aboard as the Chairman in 2010. In 2011, I became the CEO, and we then said that we need to focus this company on the software business and, therefore, we divested the Nordic services operation we have, it's quite significant. And 2016, we also communicated to the markets that we would focus or prioritize a growth acceleration rather than continue to expand margins that we've done -- that we, at that point, done really successfully starting 2011, something like that, 2012. And then 2016 -- end 2016 and beginning 2018, we acquired first, Qosmos, and then Openwave Mobility. And this is the journey. Now we're going into 2019, and we celebrate our 51-year birthday this year. But -- so the growth acceleration, that is our aim, it's really -- to explain that, it's because we think size matters. Size matters both to be perceived as a credible vendor and partner to our customers and the partner ecosystem as well. But also to leverage the economies of scale in a software company with -- and great gross margins and to keep a good operating margin we have to leverage economies of scale. So an office in Tokyo, or an operation in Silicon Valley, just have a handful of people, becomes very expensive per employee. So economies of scale is important in a software company. That was one aspect to this. The other is that there are changes and we have seen changes within our domain. And important to underline here is that the new product offerings that are coming out and open source started to gain momentum for very long time, 2 decades or more, it's really changing the business that we have. So we needed to grow away and transform the business from what it was in 2010, '11, '12 and onwards to where we are now. And this is not the endgame where we are now. This is a journey that will continue. Clearly, it changed landscape and, obviously, a new market, this landscape will continue to change going forward. We also want to balance the revenue mix. If -- you're vulnerable if a big portion of your revenues comes from a few customers and you're vulnerable if a big part of your revenues comes from one product. So if we now just check where we are after having communicated this in somewhere 2016 and worked on this for many more years than that, we have a record growth in Q4, I won't repeat everything I said a few slides back. But we have record growth. We actually have margin expansion as well. So focusing on growth and leverage economies of scale, we can also produce better margins in a software company. Acquisitions, clearly, we do believe that acquisition is the way to accelerate growth, to do it even organically, it's too expensive and too risky. With these acquisitions, we've also been able to expand the portfolio and address a new market and this if we, again, look at where we are now in Q4, the new area, which we call Network Solutions, represents 55% of our total revenues, I think, up from 7% 3 years ago. So it's a big shift. And again, with a record gross margin. So we're doing this with record operating profit, record net profit and record EPS. And we have reduced the dependency on single product/single customers. So the dependency on the Key Accounts we've had for a long time is not only down from 49% to 23%, but as we say on this slide, it's actually down from above 60%, if we go back to 5 years, to the 23% we have now in Q4 '18. So -- so far so good, and the journey continues. And this is the strategy, just shown slightly different on Slide 20. So we want to move up from software at the application level, the operating system is the lower layer in the software stack. We want to move up the software stack. But not only up the software stack, we also want to move up the value chain and not only sell software as an OEM component, but sell software as a more complete solution. And we also want to move up the food chain and move closer to the end user and have more dialogue and direct engagement with the end users of our software and solutions. And in our business, it is the telcos and if you look at cybersecurity, it is the enterprises.I just wanted to show this slide also, Slide 21. As said, this would not be possible without the acquisitions we've done. We're not doing an acquisition a quarter. We don't have that capability -- that management capability in the company. I don't also argue that it would be the right recipe for a company like Enea. But we have done now an acquisition a year in the last 3 years. So in December 2013, we did Qosmos, which has been a really successful addition to the operation as well as Openwave Mobility. And in December last year, we announced an offer to acquire an asset, a business unit from Atos. And if this deal closes, we think that it will add to the Enea business from March this year.And on this slide, I also have IP Devel. This was an acquisition we did in May 28 of an R&D services organization based in Bucharest, in Romania. The founding team of that company is still with us some 11 years after, which shows both the strength and the cultural fit -- the strength of the company IP Devel, the cultural fit with IP Devel and Enea and the ability of Enea to take care of its acquisition. And the management team is still with us and they're still very important in the development of the profitability of Enea during these 10 years. Back to Atos -- or the business unit, it's obviously not Atos, it's a business unit in Atos. If that deal closes, it would bring us more applications for the 5G and actually with the 4G core networks. So this is in line with the strategy, obviously. We move up the software side when we have software on the application level not just an embedded piece. We can therefore address a bigger part for the network, both Qosmos, but more so the Openwave acquisition has opened this market for us. And with this acquisition, we will increase the portfolio and be able to address bigger part of the network. This is the -- an acquisition with a total consideration of EUR 18 million that we would finance through cash and bank loan. And again, it's not closed. It's subject to closing conditions, but if that happens, we would be able to consolidate in -- consolidate this acquisition during March 2019. So that takes me to Slide 23, market outlook. So we want to achieve growth also in 2019. So our objective for the full year 2019 is to achieve revenue growth over 2018, and we want to continue to operate on a margin above 20%. Our objective is to have an operating margin during 2019 exceeding 20%. So with that, I would like to say thank you for this opportunity and open up for any questions if there are any.

[Operator]

[Operator Instructions] And the first question is from the line of Victor Höglund from SEB.

[Victor Höglund, Analyst]

I have a high-level question, first, on the management changes, and you becoming the Chairman here instead and new CEO onboard, what kind of changes should we assume or think that we might see? And then what would be your top priorities as a Chairman compared to previously? And you thinking about the characteristics of the new CEO, what that might bring? And then second question here, you speak a bit about M&A in 2019. Just so I interpret this correct, we should not see -- we should not expect 2, 3, 4 acquisitions in '19, but we should not be surprised if we see 1 or maybe 2. And then, if you can just briefly explain a bit more why the support of Atos fits into Enea, just high-level bullets there. So remind me.

[Anders Lidbeck, President & CEO]

So all right. Thank you for your kind words, Victor. On the management changes first, at some point, it's time to step aside, and I think that's the time for me now step aside and make room for a new CEO and make room for the management team to grow and develop under this new CEO. I have -- my ambition is to step aside, the major shareholders of the company and the nomination committee have asked if I could go back to my role that I had in 2009, 2010, as the Chairman of the Board, and I have accepted that. But it's up to the -- and the shareholders meeting to elect me as the Chairman of the Board, and that has not happened yet. So I think the time is right for me now to step aside and make room for new people. And the potential changes, if -- and it's not that you might see have to be presented from the new CEO. Obviously, I think that what we've been doing now is the right way forward, and that's why I've been working on it. So what the new CEO would do, you will have to discuss with him. And you will have the opportunity to do that very soon. He will be onboard and take over as of May, that's when the annual show is, mid in May. When it comes to acquisitions, we should certainly not expect, 3 or 4 acquisitions in 2019. I would be really pleased if we can close the acquisition, the asset in -- that we have I think now with Atos. And if we get, we need time to digest, to integrate, to improve profitability, to improve growth, to do all the things that we've been able to do with Qosmos and Openwave. So we should not expect -- this is 12 years after the other -- 12 months after the other one, a new acquisition, you should not expect -- you should expect that 12-month schedule that we've had. Now that doesn't mean that we -- if an opportunity arises and if everything is aligned, we could potentially do yet another acquisition. But clearly, as I said, my opinion is that a company like Enea, you have to take steps, you have to digest the acquisition, you have to integrate and you have to make sure that it works not only from a financial perspective but from a due diligence perspective. The secret of this is how it works after the acquisition is closed and how you make these organizations work together and how you make the new team -- management team integrate with new -- the existing management team. There are many aspects. So if we consulted the assets, that's the step you should expect. And then we do think acquisition is important, acquisitions are important, but we should not expect much more than that during 2019. So then on the 5th year of the -- this acquisition, so it's really building on the -- first, the Qosmos acquisition, as you know, we walk away with the customer of Qosmos using the GPRS functionality in their traffic management offering, going directly to the operators, what we now have it will be significantly strengthening the portfolio that we can bring through the operators. And predominantly, we're strengthening this portfolio with application. And applications in this world is things like quality management of application and user data management, things like the AAA and UDR, things that are building the 4G and the 5G networks. So this is what this group has. The history comes from Siemens, from Nokia Siemens, and then not more than -- not much more than a year with Atos, so they have significant telecom heritage and telecom knowledge. And they -- we now think it will fit very well with the new Enea that is being developed here and fits very well with the Openwave capabilities and the Qosmos capabilities. So that's my answer on your 3 questions, Victor.

[Operator]

[Operator Instructions] And there appear to be no further questions registered. So I'll hand the call back to the speakers.

[Anders Lidbeck, President & CEO]

Okay. Thank you very much for that. Thanks again for this opportunity. I look forward to present our Q1 numbers in 3 months' time. So goodbye.

[Operator]

This now concludes your conference call. Thank you all for attending. You may now disconnect your lines.