Enea AB

STO:ENEA

Earnings Call Transcript 2021-Q4

[Operator]

Welcome to the Enea Audio Cast and Teleconference Q4 2021. [Operator Instructions] Today, I am pleased to present CEO, Jan Haglund; and CFO, Ola Burmark. Please begin your meeting.

[Jan Haglund, President & CEO]

Hi, everyone. This is Jan Haglund, CEO of Enea. And I'm sitting here in Kista, our head offices of Enea with Ola Burmark, our CFO. We will be summarizing the fourth quarter of '21 as well as the full year this morning. We will be summarizing the key events. I'll give you some details on the deals that we have won and taken in the quarter. Ola will walk us through some details of the financial results, and I'll wrap up in the end with a recap of our strategy and way forward. On Page 3, we summarized the financial results of the fourth quarter as well as for the full year 2021. The fourth quarter net sales came in at SEK 279 million, a 13%, 1-3% increase on the same period last year. And we delivered a strong operating margin of 29.8%, corresponding to EUR 83 million of operating profit, excluding nonrecurring items. Earnings per share came out at SEK 2.54. Operating cash flow, also strong -- significantly stronger also on th previous quarter this year came in at SEK 142 million. And as an innovation company, we continue to invest in R&D, about 28% of our net sales goes back into R&D investments. For the full year, we came in at net sales of EUR 976 million, an operating margin of close to 26%, excluding nonrecurring items and an earnings per share at SEK 9.3, significantly up from last year's SEK 6.6. So some of the key events in the quarter on Page 4. We closed an important deal for secure authentication worth EUR 3.1 million with an affiliate of a European Tier-1 operator. We closed another important and strategic multiyear deal for traffic classification with a North American cloud computing and virtualization technology vendor. This deal over 4 years is worth USD 3.1 million. 5G and private networks in 5G is a hot and emerging area, and we're happy to announce, a reference there's a nation company called Compal Electronics a major ODM in this area that have decided to use our software for their private 5G network. We get awarded for innovation. We continue to innovate and we come out with new unique products in this quarter, in particular, our products for 5G security as well as Internet of Things were awarded in industry events. And then we did take a portfolio change in the quarter. I'll be coming back to that, but the edge market has not been evolving as expected, and we have decided that our platform for edge virtualization will be discontinued and we did decide to do a onetime write-off of SEK 20 million of capitalized development costs. So let me give you a bit more detail on coming slides on all these key items. So coming back to the contract on secure authentication on Page 5. It's a contract in over 3 years with an important European Tier-1 operator, and this is really a contract in our specialty area of security and telecommunication. Our software secures the connection to the mobile network for subscribers and for devices throughout the entire mobile network. The contract covers both the software licenses as well as professional services and support and maintenance. The financial impact in the quarter was relatively limited, EUR 0.4 million since the contract primarily builds on recurring revenue through the full contract period. And we always prioritize long-term recurring revenue. Next page, a few details on the contract we took for classification -- traffic classification. We are a world leader in traffic classification with the broadest coverage, in terms of protocol coverage for classifying different kind of Internet protocols and services. And this is an important feature, an important piece of software used by many companies, in particular, in enterprise communication and cybersecurity. So this 4-year agreement is with a U.S.-based cloud computing and virtualization technology vendor. It helps them to enhance their offering in what's called SD-WAN, Software Defined Wide Area Networks. And it allows them to provide real-time traffic intelligence for cybersecurity, for optimization and for quality of service. We're really happy about this contract also, which is yet another strategic win for us. Next page, Page 7, I did mention the win with Compal Electronics, one of the world's largest ODM providers. Our offering MicroCore was launched during last year. And it's, in fact, in a small-scale packaging of our 5G software. And I'm really happy to see them this reference where this software now is used for a private 5G network. This is an emerging trend where companies across the world are looking at deploying 5G networks to secure their connectivity, their wireless connectivity based on the new 5G standard. Our software is built around the new standard called stand-alone 5G and also build for small scale and cloud deployment. And these are really the reasons why we were selected by Compal, best-of-breed virtualized software reduced hardware cost up to 50% through the efficiency of our software, which also leads to low carbon footprint. So it's an emerging market, but we hope that this reference will help us to further enhance our position in the 5G private network market going forward. On Page 8, quick highlights on some innovation awards that we have been given during the quarter. As you know, our focus on 5G and on 5G cybersecurity is very strong. And with the acquisition of AdaptiveMobile Security in July last year, we have significantly strengthened our offering in this area. AdaptiveMobile Security is a leader in messaging and signaling security, and 5G is obviously a hot topic where potentially new threats will also emerge. And it's really important that from start to secure 5G networks from any kind of cyber attack. This is what our product suite now is -- has been deployed for, and the innovation that was recognized by Fierce Telecom awards is for leadership in 5G security. We're really happy about that. And then another win, which was, in fact, together with a customer, Telia and the partner, Amazon Web Services, where we got awarded for our Aptilo IoT connectivity control service. This is a way of building Internet of Things connectivity to devices in a secure way. It's been deployed in fact, commercially and it's also a market that we see as promising going forward. So again, really happy to get this recognition in an important industry forum. On Page 9, summarize a decision that we have taken around parts of our portfolio. Looking at 2 important sales trends for us: The market for virtualization platforms has not developed as expected, significantly slower. Partly, it's pandemic effects, we believe, but there are also other technologies that also have had an impact on this market; then there is another market, which is our traditional market for operating systems -- real-time operating systems. And for those of you following the company, it's no news that this is on a declining pattern since several years. These 2 market trends and sales trends together make us take a number of decisions here. And first of all, we have decided that our offering the edge virtualization platform will be discontinued. Is that allows us to focus on the growth areas of 5G and cybersecurity. As a consequence of this, we have decided to write off SEK 20 million of capitalized development costs in the fourth quarter of 2021. The combination of this and the continued adjustment of cost and capacity on the operating systems side, also means that we will be adjusting our workforce. We will be reducing by some 30 people at an estimated restructuring cost of about SEK 30 million and this will be done during the first quarter of 2022. Now all in all, this will reduce our cost base, starting from the second quarter by some SEK 45 million which also gives us the possibility to focus even more and to reinvest into growth areas, in particular, 5G and cybersecurity. So that's really all on the highlights. And I think now it's time to move over to some financial details, and I'll leave it over to you, Ola.

[Ola Burmark, Chief Financial Officer]

Thank you, Jan. So we continue on Page 11. So net sales in the quarter ended at SEK 279 million compared to SEK 248 million previous year. So which corresponds then -- corresponds to a growth of 13%, and that's actually 13% also currency adjusted. For the full year, we reached SEK 976 million corresponding to SEK 915 million full year 2020 and this is a growth of 7% or 11% currency adjusted. The acquired growth in the quarter was SEK 56 million, which is the growth and the net sales as AdaptiveMobile Security has added to the group net sales. In the quarter, we do also have some other revenues, which relates to loans in U.S. that have been forgiven, and these are loans given during the COVID pandemic, where we have applied for forgiveness of these loans and that have been approved during the quarter. On top of that, we have a grant for 5G development that was actually approved the grant in 2022 and we were, during this quarter, able to submit documentation which will allow us for another SEK 6 million in grants. So all in all, the total revenue for the quarter came in at SEK 293 million. And for the full year, the total revenue was actually SEK 1 billion. If we look at our product areas, we still see that the Network Solutions area, is the major part. It now represents 77% of our net sales, which is shown on Page #12. In total, we have increased net sales in fixed currencies of 25%, largely driven by the acquisition of AdaptiveMobile Security. Organic growth for the sort of nonacquired part of the Network Solutions, that growth was negative by 8% in the quarter. And the reason for this being that we do sell lots of licenses to larger operators across the world. and those license revenues tend to fluctuate all the quarters. And compared to the fourth quarter 2020, our license revenues were less. Operating systems declined by 18%, and this is one of the reasons which Jan explained earlier on, that this has been declining for several years, and we are also taking measurements to adjust the cost base going forward. Our software development services represents today about total sales in the group, and it has since last year decreased by 12%. And this is mainly driven actually by the COVID effects and in particular, towards the U.S. market where we, in the past, have big exposure to the airline industry where we have less sort of external work to perform. So we move to Page #13. Profit-wise, before nonrecurring items, we ended up at almost 30% EBIT margin for the fourth quarter or SEK 83.1 million. We do have some nonrecurring items in here, which is mainly the write-off of the edge work salutation platform of SEK 20 million as a reported EBIT is on SEK 61 million or a margin of 21.9%, which is very much in line with low [indiscernible], despite the one-off write-down. So earnings per share, SEK 2.54 for the quarter and SEK 9.30 for the full year. Thank you. We move to next one. Short summary of the financial position. We are still a very cash flow generating company. The cash flow before changes in working capital amounted to SEK 112.8 million compared to SEK 80 million previous year. And the cash flow from operations amounted to SEK 142 million compared to SEK 61 million same quarter last year. In total, our interest-bearing bank loans amount to about SEK 740 million. This is an increase of which is related -- compared to last year, which is related to the acquisition of AdaptiveMobile Security, which was 100% debt funded and cash for the end of the year amounted to SEK 211 million, which leads us to a net debt versus EBITDA of 1.41, an equity ratio of 58.6%.

[Jan Haglund, President & CEO]

Thank you, very good. Thank you, Ola. So I'll just wrap us up at the end on Page 16. Just summarizing and reiterating our strategy, we stay firm on our strategy as a software product company. Many of our competitors are encumbered or hindered by legacy hardware business. But as a pure software company, we fully embrace the cloud technology, best-of-breed business models and as a service models to both deliver and commercially address our customers. And we're not a full system vendor, but rather we are selective. Our strategy is to provide software components in market segments with good profitability and growth potential and being a specialist, being a leader in everything we do. And we have some exciting and important trends that we are leveraging and where we have a good and early position. In particular, 5G core networks that I did talk about before, where, in particular, data management is a hot area where we have some very important references and a broad and leading portfolio. Cloud-native telco software is the future for the entire telco industry and all future communication networks will be built around software adapted and specialized for cloud. And the last but not least, cybersecurity with increasing threats to people, enterprises and society. We see cybersecurity as an important area to address, to be in and quite frankly, to be able to help also against these threats. There is a lot going on, and we see increasing trends here. And I'm particularly happy that AdaptiveMobile Security gives us a leadership position in messaging and signaling security for mobile infrastructure. This gives us an outlook on Page 17, where we have and maintain a positive long-term view on the market. We see growing markets for 5G and cybersecurity. We believe we have a strategy on a position and the competence and the global culture to challenge established players and to increase our market share. And therefore, we maintain our target to significantly grow revenues, both organically and through complementary acquisitions as we have done during recent years. In particular, its Network Solutions that is our growth area. This quarter, it grew by 25%, and we intend to continue the growth of Network Solutions, while maintaining an operating margin of healthy 20% or above, and to surpass an annual turnover of SEK 1.5 billion latest by 2023. Now in the shorter term, we, of course, do see the pandemic that still holds the grip on parts of the world, although we also see trends going back to more of a normalized business. So step by step, we believe that the hinders that we are still seeing on project delays and hinders for new sales, will hopefully then be reduced during the year. This gives us an outlook for the year of continuing to increase revenues compared to previous year and to maintain our target of delivering an operating margin above 20%. With that, I thank you for listening and give it back to the moderator.

[Operator]

[Operator Instructions] And our first question comes from the line of Jesper Von Koch of Redeye.

[Jesper Von Koch Henrikson, Equity Analyst]

All right. So let's start with the Network Solutions where you reported a negative organic growth of 8% due to some timing effects on licenses and royalties. So can you just elaborate on the underlying reality of this segment?

[Jan Haglund, President & CEO]

Thank you, Jesper. Now, as I think Ola stated, our business is built on combinations of licenses, professional services, support and maintenance contracts. And we also have a dependency -- an increased dependency with the growth of network solutions on larger deals. And they have variations between the quarters. And we believe that what we see here is an example of that variation. We had higher revenues, in particular license revenues for some of our business in the fourth quarter in the same period last year. Therefore, the negative trend without the new acquisition in the quarter.

[Jesper Von Koch Henrikson, Equity Analyst]

All right. And so regarding the shutdown of the Edge product, this came as a surprise for -- at least for me since you I mean, quite recently written more than one post for example, your blog about the possibilities of the edge in combination with, for example, SD-WAN and the boost from 5G fixed wireless access and so on. Can you just explain some more reasons behind the shutdown?

[Jan Haglund, President & CEO]

Yes. No, thank you for that. It's a good question. I mean we -- as a technology company, we make choices every day. and we see a lot of opportunities and possibilities in our growth areas of 5G and cybersecurity. The edge virtualization platform initiative, which was started several years ago was and has been, to a large extent, built on our legacy position as operating system provider. And there has been a market trend towards virtualization, in particular, small-scale virtualization, and that's why we decided to try out and to invest in that. But what we've seen during recent years, in particular, the last 2 years is a significant slowdown of that market. Slowdown, probably dependent on partly the pandemic because we see enterprise customers building their enterprise networks in different ways or perhaps not building different networks in different ways. But we also see other technology alternatives emerging like a cloud-based communication also for enterprises. So all in all, with the choices we have on growth areas, and the weak market outlook. We've chosen to take this focused decision, which is really about spending our time and effort and resources where we see the best bang for the buck.

[Jesper Von Koch Henrikson, Equity Analyst]

Great. And so if we move on to Software Development Services, it seems that this segment is still struggling from the pandemic. And first, is this related to the continued downturn in the airline industry? And if so, what are your expectations on this going forward?

[Jan Haglund, President & CEO]

Well, Software Development Services is an area where we have a strong customer base. We have many customers that rely on us and we get very positive feedback also on our competence, especially for real-time critical embedded software. And there are companies, new companies and segments where we have been growing healthily also, for example, medical industry that has had a positive effect during the corona pandemic. And we continue to see that. However, as Ola stated also historically, we have had a strong customer base, in particular, in North America of companies depending on airline industry. And as we all know, airline industry has taken a significant hit during the corona pandemic, and part of what you do as a company then is to take out cost and take out consultants. So that consultancy business has done for us, significantly declined as a result of the COVID pandemic. But again, it's been partly compensated by growing areas like medical industry and automotive industry also. So it's a good and healthy business for us, generating recurring revenues. But again, it has taken a hit during the pandemic.

[Jesper Von Koch Henrikson, Equity Analyst]

Great. And then just one last question about the operating systems here. I mean we believe it's good that you're taking actions to adapt the organization as revenues decline. But just about the decline, is this going faster than you had previously anticipated? Or is it somewhat in line with expectations?

[Jan Haglund, President & CEO]

I would say that it's in line with our expectations. As you may know, we have some contracts where we are recording royalties and revenues as they come. So depending on the production of new units from these customers. And then we have other contracts which are stable and predictable with one, for example, of our key customers over 4 years, that was closed in 2019. So all in all, this is in line with our expectations. And we also believe that given the dependency customers have on the installed base, the importance of being able to support and maintain the installed base. We continue to have a strong position as well as being important for these customers for a long time to come.

[Operator]

Currently, we have one further person in the queue. [Operator Instructions] And that next question comes from the line of Simon Granath of ABG.

[Simon Granath, Research Analyst]

A couple of questions from me. Initially, on the cost savings, could you give some more color on the timing for these? And adjusting for the nonrecurring items that are expected in Q1, should we see any positive effects to your cost base already occurring in that quarter?

[Ola Burmark, Chief Financial Officer]

So you will see the impact of these sort of these restructuring it will have basically full effect on an annual basis as from the second quarter 2022. So this restructuring or reorganization is implemented as we speak during this quarter. And the restructuring cost that was mentioned here will be the cost for the total program that we will take in the first quarter 2022. And then those costs will be out going forward.

[Simon Granath, Research Analyst]

Okay. And over the years, you have broadened your product portfolio quite significantly, how would you say that you are now positioned in terms of portfolio breadth to capture the trends you mentioned here relating to 5G, cybersecurity, et cetera. Is it more about investing in the current products that you have over? Or is it also about broadening the portfolio further?

[Jan Haglund, President & CEO]

Yes, thank you. Well, I believe that in the areas that we addressed and have been investing in, for example, data management for 5G and now recently, cybersecurity for messaging and signaling, we are well positioned. We have a both portfolio as well as competence to address customers, small and large, and we are doing so. Having said that, there are more areas to look into. And we are continuously evaluating both through organic investment and through complementary acquisitions, areas where we can also take a leadership position and where we have synergies, both technical synergies and go-to-market synergies with our sales force. That's what we did through the acquisition of AdaptiveMobile Security where we have found synergies both technically as well as with the customer base. And we will continue to drive that strategy going forward.

[Simon Granath, Research Analyst]

Also, could you comment on the recent introductions to the market relating to private 5G networks, including Amazon and Microsoft? Do you see any read across from these introductions to your business?

[Jan Haglund, President & CEO]

Yes, good question. Yes, it's a very hot market, and many players are addressing this, including the large cloud providers that you mentioned. And they have a tradition also and an established base towards the enterprises and private networks. For us, we are completely agnostic to the underlying platform. Our software is cloud native, which means that it runs perfectly on all these platforms and more like Amazon, like Microsoft and other alternatives also. So I believe this can be good for us we will probably see more and more deployment on these kind of public cloud platforms going forward.

[Simon Granath, Research Analyst]

And on AdaptiveMobile, I believe it was a good quarter presented from that entity. Should we expect a similar run rate as the recent numbers were at going forward? Or was this an extraordinary strong quarter for that entity?

[Jan Haglund, President & CEO]

I mean, we're happy about the start of AdaptiveMobile Security. We acquired it in July 2021, and we have had, I think, not only 1, but 2 good and strong quarters. I mean this is a business also which is built on software. So I think variations between quarters are to be expected also in this area.

[Operator]

And we've had one further person join the queue. That's Erik Larrson of SEB. Please go ahead.

[Erik Larrson]

I just have one question on the write-down closing the Edge business line. Can you just give us some flavor of the impact on organic growth going forward? I mean is it a tangible part of the business today?

[Jan Haglund, President & CEO]

Thank you, Erik. The business model for edge has been entirely built on deployments, meaning that our revenues would scale with customers deploying and scaling up their networks. And I mean, as I mentioned, the market has been very slow, which means that deployment for us and for the market have been really limited. So that means that the revenue impact is very limited through this. And Ola, can give...

[Ola Burmark, Chief Financial Officer]

Just basically neglectable revenue in 2021 generated by this product line. So it's less than SEK 10 million or even half of that, that we have in the numbers for 2021. So it will not have an impact for growth going forward.

[Erik Larrson]

All right. And just one more question on your guidance because I mean looking at '21, it seems a bit conservative with 20% operating margin given where you are now. What's sort of your take on that?

[Jan Haglund, President & CEO]

Yes. I mean, we've been beating the 20% margin every quarter during 2021, and we're really happy about that, and we're happy, of course, about the full year result also 26%. So yes, we've given the guidance for previous year of 20% and above, and we maintain that. Obviously, we have an ambition to continue to grow revenues and to maintain healthy on the operating margin side. So that's what you should hope and expect from us going forward.

[Operator]

And as there are no further questions going for it at this time, I'll hand back to our speakers for the closing comment.

[Jan Haglund, President & CEO]

Very good. Well, thank you for listening this morning in Europe. Enea stays focused as a software product company, addressing 5G and cybersecurity as exciting markets, and we're grateful for your support and attention, and we'll be happy to answer questions also off-line from anyone that wants to go deeper. So again, thank you for listening, and bye-bye.