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Hexagon AB
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Hello, and welcome to the Hexagon Q3 report for 2020. [Operator Instructions] Today, I am pleased to present Ola Rollén. Please go ahead with your meeting.
Thank you very much, and welcome, everyone, to this third quarter interim report of 2020. I suggest that we start on Slide #4, overview of the third quarter 2020. So recorded sales decreased by 2%, and we report an organic growth of 0%, FX of minus 4% and then a positive 2% impact from acquisitions during the year. It's a broad-based sequential recovery, and we see China recording 18% organic growth. We report solid growth in the Geospatial segment, and Geosystems and Space & Infrastructure record 5% and 9% organic growth, respectively. But we do see continued negative organic growth the Industrial segment where Manufacturing Intelligence and PPM record minus 4% and minus 7% organic growth. Software recorded growth in the quarter, whilst hardware contracted. This is our best third quarter earnings and margin ever. It's close to being the best quarter ever if you adjust for FX. Earnings amounted to EUR 250 million, an increase of 6%. The EBIT margin was 27%, which is 2% improved EBIT margin over last year. The gross margin improved by 1%. Cost-savings measures and the richer product mix impacted earnings in a positive way. But earnings and margin were heavily impacted by currency headwinds. If we turn to Slide 5. This is just a reminder that Q3 is our second-weakest quarter in a normal seasonal pattern. We go to Slide 6, the P&L statement. Net sales amounted to EUR 940 million, which is 0 organic growth and minus 2% recorded growth. We have an FX impact of minus EUR 37 million on the top line. We moved to EBIT1, it amounted to EUR 250 million compared to EUR 236 million for the corresponding period of last year. That is a 6% growth. Currency impacted our EBIT1 by negative EUR 20 million. So with comparable FX, we would have recorded EUR 270 million this quarter, which would correspond to an EBIT margin of 28%. I think I'd skip Slide 7, that is for your reference, the 9 months, and we go straight into cash flow on Slide 8. Cash flow from operations improved significantly in the quarter. And as we can see before taxes and interest paid, it was EUR 352 million versus EUR 324 million the corresponding period of last year, so a 9% increase in raw cash flow from operation. If we then move down the table, we see that we have an adverse effect in working capital, and that is primarily receivables growing again. We also see that investments are roughly at par, slightly lower tangible assets and same level as last year. But cash flow from operations before nonrecurring items is EUR 213 million. Our restructuring program is now kicking in. So nonrecurring cash flow, which is payout to laid off work, is now EUR 22 million. Operating cash flow, EUR 191 million, which corresponds to a cash conversion of 103%. Moving on to Slide 9. Working capital to sales is now 9.5% of sales, so the decrease in working capital continues. Market development, Slide 11. The sales mix, the significant change is really in North America that has diminished by 2 percentage points and China that has increased by 2 percentage points. Slide 12, an overview per geographic region, where we see good growth and strong double-digit growth, both in South America, where Brazil, the mining sector, are pushing growth; and China, which is the broad-based recovery across many industry segments. Eastern Europe, Middle East and Africa were doing fine as well. Whilst we saw continuous decline in North America, Western Europe and the rest of Asia, excluding China. Slide 13 is for your reference, but it shows the third quarter per business segment and geographic region. We move on to Slide 14, EMEA market trends. Western Europe, minus 3% organic growth. We saw weakness in traditional automotive and aerospace in the third quarter. We also saw weakness in the power and energy sectors in Western Europe. On the other hand, we saw solid growth in surveying, which is an early indicator for construction and infrastructure and also public safety segments in Europe. Russia and Middle East recorded double-digit organic growth on the back of a continuous recovery in Russia and a large public safety order in the Middle East. Americas, Slide 15. North America recorded minus 5% organic growth. We saw weakness in the manufacturing segment in North America and tough comparison numbers in the power and energy segment. The mapping and positioning segments recorded good growth in the region. And South America, as previously stated, double-digit growth on the back of mining, public safety and the recovery in Brazil. Asia, finally, on Slide 16. As previously stated, China recorded 18% organic growth. We see a strong recovery in electronics, general manufacturing, infrastructure and construction. We also saw good growth in the quarter in South Korea, where we recorded double-digit growth, fueled by solid development in infrastructure and construction. Southeast Asia and India report continuous decline, heavily impacted by the pandemic. Slide 17, reporting segments. And we start on Slide 18, Geospatial Enterprise Solutions. Geospatial had a great quarter, reporting 6% organic growth, where Geosystems grew by 5%, SI recorded 9% and Autonomy & Positioning 6% organic growth. The EBIT margin improved to 28.4%, which is a record for this segment. It's up more than 3% over the corresponding period of last year. Moving on to the Industrial Enterprise Solutions segment. Organic growth, minus 5%. MI reported minus 4%, where we saw weak demand in traditional automotive and aerospace segments. China, on the other hand, reported solid organic growth, and it was mainly driven by a recovery in electronics and general manufacturing. PP&M, minus 7%, a very, very tough year-on-year comparison. And the backdrop is the challenging oil and gas market in the third quarter. However, we saw continuous solid growth from the AEC segment for our design software portfolios. EBIT margin, roughly the same as last year, 25.4%, versus 25.7% for the corresponding period over last year. Slide 20. The gross margin came in at 64% in the quarter. But rolling 12 months, we're still at 63%. EBIT margin came in at 27% for the quarter. But for rolling 12 months, we're now at 25%. M&A, orders and product releases, Slide 23. We announced an acquisition of TACTICAWARE. TACTICAWARE is a software company using LiDAR-based 3D surveillance point cloud to create a digital image of, for example, a building, as you can see in this picture. And you can create a geofence in an object like the picture. And if anyone intrudes, that geofencing will trigger a signal. Now we are planning to use our sensor, the BLK247, and our dispatch solution, HxGN OnCall to offer a fully integrated end-to-end secure surveillance solution for 24 hours, full visibility of critical infrastructure and spaces where you can automate alarm management. Slide 24. We launched the Leica GF18 I in the quarter in connection to a trade show in Germany. What we've done here is we've fused GNSS, IMU and camera-based technologies. So it's the first GNSS rover of its kind to enable measurement of points from images with survey-grade accuracy. Professionals can now map barriers that are difficult to reach physically, such as trenches, high-power lines and busy roads by simply taking a picture of the object. It will also work, thanks to its IMU module, in blocked areas where you're blocked from GNSS signals. Moving on to Slide 25. HxGN OnCall, which is having success in the market, is now launching a module called Smart Advisor. It's industry's first assistive artificial intelligence technology, where the Smart Advisor will be in the background of all the information that the core taker receives and autonomously analyze what the general public sends into the dispatch center. And it will detect patterns and anomalies sooner than humans, and agencies can act faster and coordinate smarter response to those patterns. Slide 26. We've partnered with Utopia Global to create an integrated solution where we can synchronize engineering and maintenance data between the SAP plant maintenance system and our own HxGN SDx software platform. This is very, very good news for the oil and gas, utilities, chemical and manufacturing industries that needs to synchronize this kind of operational data. Slide 27. We're also supporting the world's first autonomous head-to-head motor race. Indy Autonomous Challenge will take place in 2021, and it's the first autonomous race using autonomous racecars. They will speed at 200 kilometers per hour, and we will use our equipment and precise positioning systems to keep them on track. Slide 28. We are accelerating off-road autonomy for agriculture, and we have a new testbed where we use state-of-the-art tractors to do research and development for autonomous tractors. And these are learnings that we then transfer to our OEM customers that then implement it in their production and products. Slide 29. A new simulation product will enable mass production of additive manufacturing. It's the so-called metal binder jetting simulation software that enables the manufacturer to predict and prevent distortions during design that could result from a so-called sintering process. The simulation will predict mechanical stresses in the part, giving an indication as to where defects may occur. Slide 30. We take surface measurement to a new level. Transparent materials such as glass or plastic has always been a problem in measurement. But with CALIPRI CB20, we've solved that problem, and this will enable automobile manufacturers to better meet the requirements of flush and gap measurement, i.e., the gap between, for example, the headlight and the sheet metal panel. Slide 31. We're collaborating with the Indian Navy and the Colombian Navy using the Luciad technology and M.App Enterprise to perform time-critical analysis, simulations and command and control in naval operations. Slide 32. We received several mining orders in the quarter related to operator safety from South Africa, Australia and Colombia. Slide 33. The HxGN Content Program provide Germany's first digital surface model. The problem was that existing data sets varied from state to state in Germany and that created problems for federal authorities operating across the country. But with data from the HxGN Content Program, they can now create applications such as air traffic control, disaster relief and civil protection. Slide 34. This is actually a growing business for us where we use our 3D-based technology to model important buildings. And this time, it's the Budavár Palace in Hungary. And you can compare this to why people want to do this, it's simply to document historic buildings. And think about Notre-Dame in Paris, where we thankfully have done a documentation weeks before the fire occurred, and they're now using this to rebuild the historic building.Slide 35. Reducing map production time for U.S. intelligence forces. We've sold our highly automated custom solution that reduces map production for the National Geospatial-Intelligence Agency from months to hours. And this is, of course, to help NGA meet mission requirements. Slide 36. HxGN OnCall continues its success in the market with several new orders. Here, we have a select 3 orders in North America. Slide 37. We're also supporting public safety in Ecuador, helping Ecuador's CSCG organization to combat crime and provide timely assistance to those in emergency situations. And this time, it will encompass 2.7 million citizens. So in summary, if we turn to Slide 39, our summary page. Record Q3 earnings and margin despite significant currency headwinds. It's been supported by cost-saving measures and richer product mix. We saw a solid sequential improvement, recording 0% organic growth. It stems from broad-based recovery in China and a strong quarter-on-quarter recovery in both North America and Europe. Software continued to grow. Hardware continued to contract. The Board of Directors also proposed a dividend of EUR 0.62 to be paid out for fiscal 2019. And with that, operator, we have come to the end of this presentation, and we are now ready for the Q&A session.
[Operator Instructions] And our first question comes from the line of Joachim Gunell of DNB Markets.
So I guess in terms of cadence with your software sales, it definitely varies a bit from end market and customers. But can you say anything regarding how contract renewals have behaved in the quarter? And are there potential deal slippages going into Q4 instead?
No, I think Q4 will perform roughly as -- well, similar patterns as to what we see in the third quarter.
That's clear, Ola. And finally, you mentioned again, I mean, challenging conditions in oil and gas and aerospace. But can you perhaps just expand on how you will position Hexagon for this? Is there a need to undertake more restructuring measures to offset if this weakness will sustain?
You can never rule out more restructuring. But what we believe right now is that we need to continue to diversify the PP&M division, not being so reliant on oil and gas and growing into the [ AEC ] field, for example. When it comes to aerospace, it's a similar situation where we've seen great growth for electric vehicles, wind power and solar power. And it's actually the same products that you use to measure a layout of solar farm or measurement of wind turbines and electric cars as you do for aerospace. We don't believe a quick recovery in aerospace.
Our next question comes from the line of Daniel Djurberg of Handelsbanken.
Ola, congratulations on a really strong quarter. I would like to see if you could elaborate a bit on the OpEx savings that we have seen in the quarter from both short term and more longer term, i.e., COVID-19 related and not related anymore to your cost-saving program, i.e., some help to model into Q4. If we expect some temporary reduction that will come back, with more to think of a traditional seasonality pattern on OpEx coming in Q4.
It's -- we don't know yet, but we believe it's going to be more or less [ a wash ]. What we've seen is that short-term furlough measures are being replaced by long-term reduction in force when it comes to savings on payroll. Other great savings areas are, of course, traveling expenses where we've seen a significant drop in the money we spend on traveling. That is obviously going to recover, and we're going to see more traveling going forward. But we don't believe that it's going to come back to the previous level pre-corona, simply because we're using Teams and other digital platforms for meetings.
Yes. And Yes. And that's my follow-up on your products 247 -- the BLK247 seems not to be in the market yet. I'm just wondering if you have any details on that, and also how the BLK2GO is performing.
The BLK2GO is doing fine, and the BLK247 is a part of a larger initiative where the acquisition of TACTICAWARE was important to have the fully fledged solution to offer customers. It's now in trial in some 5 test sites around the world. It's involving metro stations, public places and so on where test customers are trying out the technology. So it's a longer sales cycle for BLK247 than BLK2GO.
Our next question comes from the line of Alexander Virgo of Bank of America.
Many, many questions, I suppose. But I'll focus on 1 and 2. So the first question is I just wondered if you could talk a little bit more about the sustainability and complexion of that China recovery. You obviously phrased it as back with a bang last quarter, and I would suggest that it's carried on being back with a bang this quarter. So just wondering how you can -- if you could give us a little bit more color around that.And then second question on the margins. You've come in essentially at the lower end of the 2021 target range in Q3, which, as you noted, isn't normally the strongest quarter. So really encouraging when we think about that for next year. I just wondered if you might be able to give us any help with how much of that margin benefit came from those structural savings given they've only just started to come in. I guess where I'm coming from is that there'll presumably be much more to come next year.
Thanks. Yes, the sustainability in the Chinese recovery, it seems that China has decoupled from the rest of the world and continues to soar. The one who lives will see. But we haven't -- we've seen a similar pattern in the fourth quarter as we've seen in Q3 in China, the start of the fourth quarter. And it's a broad-based recovery. It's actually traditional industries like traditional cars that have recovered in China. And we did not see that happening in core countries like Germany, France or United States to the same extent in the third quarter. Regarding the margin, it's important to remember, we believe that the savings we have up till now will more or less be passed into 2021. But don't think of an acceleration because we're also going to see increased activity where short-term savings are going to be lost due to more traveling, for example. But the structural savings we've talked about, they are definitely going to be there.
Our next question comes from the line of Mikael Laséen of Carnegie.
Yes. A follow-up on the savings measures. Can you say what you have done so far in terms of more fundamental structure changes? Can you give a few examples?
We have shut down, I believe, we're up to 10 facilities. We've laid off some 1,100 people, and that pretty much sums it up.
Okay. And this is what you needed to do. So that is basically completed?
The long-term measures, we still have a bit to go in the fourth quarter. And merging offices will take longer time than the reduction in force. But the reduction in force more or less be done and concluded by the fourth quarter of this year. Then the infrastructure, if you can call it that, our fixed assets, bricks and mortar, that will take a little longer. This has to do with rebuilding offices and so on by merging them.
Okay. Good. And just curious about PPM revenue exposure, how much is oil and gas right now approximately? And how much of revenue is stemming from the AEC side?
AEC is still very small, but AEC provided strong growth in the quarter. I can't give you a breakdown, but we can come back on that to you.
Okay. Great. And then a final one, if I may. It would be interesting...
Oil and gas -- sorry, I got it. Oil and gas, 30%.
Okay. Great. And it will be great to hear comments about your solutions supporting decarbonization, a very important focus area for investors. And it will be even more important going forward. And you also mentioned that in your comment in the report. Can you recall quickly and then mention something what you are doing there and how you look at this?
We have some pretty big ideas, and we will come back, I believe, in connection to the Capital Markets Day and discuss it.
And when do you plan to have that?
We will see. But I think we need a different forum than the earnings call to discuss our carbon offset solution and our environmental solutions. But we definitely are looking at that.
Our next question comes from the line of Sven Merkt of Barclays.
Could you give us some insight into the strong performance for Geosystems? How much of that was a catch-up from Q2 versus maybe a more sustainable recovery? And could you comment if you maintained that performance so far into Q4? And then secondly, just a clarification for the first question. You mentioned you're expecting a similar performance in Q4 relative to Q3. Was that for the whole business or just for software?
I comment on the software, but I think it's fair to say that we more or less believe that Q4 will continue the way Q3 ended. But if I comment on Geosystems, it's interesting, we have -- we see a lot of automation, mining reports into Geosystems. And what's growing in our mining segment is really automation solution. The same goes for construction, where we have a lot of new automation solutions in connection to large infrastructure projects, and that grew as well. But then we do see a broad-based recovery for traditional surveying, which indicates that we're going to see much more infrastructure and construction investments going forward.
Our next question comes from the line of Stacy Pollard of JPMorgan.
First one, to what degree do you think new product launches this year are to credit for that very nice uplift in growth in the Geospatial division? So for example, what portion of that 6% growth would you say? And maybe just following up on that previous question. I mean do you think that is -- that 6% growth is something that continue sort of for the next 12 months given the weaker year-on-year comps? And maybe a follow-up after that.
If we start with new products, I believe that new products help us -- helped us a great deal growing in the third quarter. We guesstimate roughly 2% being new products in the third quarter compared to 1% in the second quarter. So we do see a sequential increase in new product sales. And that's just natural since we held off in the second quarter, and it wasn't the right timing really to launch new products. And your second questing, can you repeat that?
It was really just do you believe that, that 6% growth is sort of sustainable over a 12-month period of time?
I don't know. We'll see.
Fair enough. And then just quickly, you mentioned the 3 weaker sectors. I know you've touched on them a little bit. Just maybe -- do you think there are any structural issues that could weaken demand for the longer term? Or do you feel like those are cyclical and they will come back?
It's funny to say, but I do think that over the longer term, we're going to see a recovery in oil and gas simply because all the large owner operators are underinvesting right now. And even if we see a declining demand for oil and gas products globally, we're still underinvested. So our belief is still that we're going to see a recovery from these levels. When it comes to aerospace, it's anyone's guess really. How many flights have you been on last month?
Probably as many as you.
So I mean, will we -- in near -- I mean, there is an underlying growth in air travel. But I think that we've had a reset where many of the trips you did in the past you wouldn't do going forward. So I think what that alludes to is really that we're going to see airlines cancel orders, which will eventually hit a very strong backlog with the major OEMs and that is going to slow down deliveries. So aerospace, I don't believe that we should believe in a recovery anytime soon. And then another fascinating trend that we saw in the third quarter is definitely that all the OEMs in the automotive industry are very much engaged in investing in electric vehicles or hydrogen vehicles. But the traditional combustion engine product, there was very little investment activity in the third quarter. Whether that is a long-term trend or not, I think is for anyone to guess.
Our next question comes from the line of Erik Golrang of SEB.
I have 3 questions. The first one is, in the second quarter, you were quite helpful in breaking out the specific software element from sales. I wonder if you could give us those numbers for Q3 as well. Second question is on the M&A side in terms of potential activity there. We know that competition is heating up with sort of new entrants investing, particularly in the industrial side of your business. Does that mean we'll see more deals in the Geospatial perhaps? And then thirdly, if could you just give some flavor on the demand development during Q3. And obviously, September is always stronger, so perhaps from a year-on-year perspective.
I'd start with the third question, the demand development. Yes, it's obviously so that September was much better than July and August, which is quite natural. But one should expect a sequential recovery from very low level in the weakest markets. The world is not going to end this time either. Could you repeat your question on -- your second question again for me?
No on M&A, I mean, the activity has been a bit lower for you, at least in terms of medium- or larger-sized deals. And the question was really that we have seen some new entrants being competitors to yours perhaps now, particularly on the industrial acquisitions. And I wonder if that's going to lead to you perhaps being more active on the Geospatial side in terms of what we should expect from the M&A pipeline.
I think the M&A activity has been -- since June, it's been on a very high level. And the reason why we haven't announced anything yet doesn't mean that we haven't been active. So I think you should just wait and see. And then finally to answer your question on software and service, we believe it was around 60% and 35% will be pure software. So if you include maintenance, maybe approximately 40% software.
Our next question comes from the line of Mohammed Moawalla of Goldman Sachs.
Ola, I wanted to actually just follow-up on that software question. Maybe just to help us understand in the divisions where, historically, they have been much more kind of hardware heavy. How has the mix changed? And as we think about the sort of improvement you cited on Geosystems, how much of it was sort of software-led? Because obviously, at the group level, you talked about the sort of gross margin improving. So should we assume that the software element within things like Geosystems is actually growing substantially faster than in sort of what you're reporting, and therefore, this is much more kind of recurring, this revenue growth?
Yes. I believe that's a fair statement. Software grew in Geosystems. So no, I think you're right in your guesstimates.
Great. So I don't know if you can give us a sense of the mix versus, I don't know, 3, 4 years ago in Geosystems and MI, how much that software mix has changed. I mean you gave us a group level number, just curious to kind of understand the delta, if you have it.
No, I don't have it. But still, 40% is pure software, i.e., license, subscription and maintenance of our mix in the third quarter. I think that once we have a little more time, we're going to lay out the text for you and show the more longer term trends when it comes to software and hardware growth, which we now have data in a weak period to show and compare to other weak periods in Hexagon's history.
Good. And lastly, I mean, a lot of software companies in Europe are now talking about accelerated shift to subscriptions. These new sort of software revenue they're generating, are they on a subscription model out of the box? Or are they still a mix of kind of license maintenance as well subscription?
We still do a mix. And we are firm believers that you shouldn't force your customer base towards the subscription model. Having said that, the underlying trend is absolutely that subscriptions are growing faster than perpetual.
Our next question comes from the line of Markus Almerud of Kepler Cheuvreux.
So to follow up a little bit on Erik's questions. On the software sales, the pure software, what growth did you see in pure software in the quarter, if you could help us with that would be very helpful. I think it grew by 5% you said in Q2.
Yes. I think we have similar growth in the third quarter in software. It wasn't pretty much. I mean we have a positive 0 organic growth if you look at the nitty-gritty details. And the lion's share of that growth is generated by software growth. Hardware declined in Europe and North America, but it did grow in Asia fueled by China. But the rest of the growth is software.
Okay. And then if I can ask on M&A to follow up there. What would you estimate that your -- what is your financial room for acquisitions roughly would you estimate?
Without any rights issue, I guess, right now, we could, in our own balance sheet, fund something around EUR 3 billion. Then obviously, you have to factor in the acquired entities' EBITDA. And beyond that, we could also do a rights issue.
Our next question comes from the line of Wasi Rizvi of RBC.
A couple left from me, and mainly kind of digging into things you've mentioned before. So just to go back to that kind of Q4 similar patterns to Q3. Sorry to go on about this. But it seems consistent with the virus going up and restrictions going up, but government is trying to protect economic activity. But which parts of your -- just help us in our thinking, if things get worse, which parts of your business do you think would be more exposed to increasing restrictions? And I don't know whether that means you have to go into quite a lot of detail based on products or geographies, but just help us understand which might be more sensitive. And then the second one was more on one of your comments on auto, where you said the OEMs are engaged in kind of EV and hydrogen development. Does that mean you're already seeing the orders and the revenue? Or does that mean you've got a pipeline of things that are going to come through in the future from the engage comment?
We'll start with the last question. Yes, we've seen orders in the third quarter, but we also have a pipeline that we work on. Regarding if we come back to a lockdown situation, it's probably going to happen in Europe and North America because that's where the numbers are escalating. We don't see a similar increase in China, for example. And then the hardware business is the one that suffers the most simply because you need the physical transport to the customer to deliver.
Got it. And then just going back to auto, does that mean that Q3 also had something from the hydrogen and EV investments coming through? Or is it something that started and you're going to see in the -- more in the future than it was what you've had already?
No. I mean we've been involved with electric vehicles for the past 4, 5 years. So it's not a new phenomenon. But we did see an increased activity in the EV market.
Our next question comes from the line of Olof Cederholm of ABG Sundal Collier.
Just a quick follow-up on the great margins in Geospatial and maybe a more direct question. 28% margins, was that a function of just very good growth in certain markets where you have high profitability? And is this sort of a margin level we should expect going forward now for this division?
It is a function of structural savings and mix enhancement where we had a richer product mix in the third quarter than ever before. We had also implemented a lot of structural changes that we were planning to do anyway, but lifted the margin. Going forward, we will see what happens. We don't give forecasts, so...
No, but there was nothing exceptional from the way you think about it. It was just great execution on cost savings, coupled with the mix, yes?
Yes, I mean the mix will hopefully continue to improve over the years to come. And the structural changes that we've discussed, they are here to stay. So I think that's...
Our next question comes from the line of Viktor Högberg of Danske Bank.
So could you give us any comments on the electronics business and the recovery in China? Was it helped in Q3 by a certain large OEM launching a new handset device a couple of days ago?
Could be.
Okay. Do you have any other comments on the potential or the recovery? We've seen the numbers coming up sequentially in the electronics business, is it mainly in China? Or is it -- what do you see for electronics?
We see -- our main market is still in China. We are beginning to see increased activity, for example, in Vietnam where certain OEMs have relocated manufacturing. So Vietnam could be a good future market for electronics as well.
Our next question comes from the line of Magnus Kruber of UBS.
Magnus Kruber with UBS. Congratulations to a good print. A slightly bigger-picture question. So a couple of days ago, we saw a German software firm commenting on slightly weaker margin progression as they transition to the cloud over the next few years. How do you see that panning out for Hexagon? And do you have a sense for the margin impact that this transition to cloud will have for you? I know you say you don't sort of push customers to make the transition, but it would still be interesting to know the margin differentials between the offerings.
No, it's absolutely right. It's important to remember that the plow operator will take some of your margin. And if you can't compensate for that with the customer, you're going to see a margin decline. And that's just natural as you migrate to the cloud. Having said that, many of our customers will not put their software in the cloud simply because -- take a police force, for example, they want to have it on premises, and so does many of the large OEMs that we work with. So we don't see a significant impact from moving from on-premise to cloud on our margins for our software, but there is definitely an impact as you do it.
Got it. Do you have a sense for sort of what proportion that ultimately will move and where you are at the moment?
No, I think long term, many nonreal-time solutions where you're not in need of very quick response, then you could put it in the cloud. And that will facilitate maintenance and upgrades for us, which will be a positive cost impact that will offset the operator's margin. But I do think that nonreal-time critical applications will eventually end up in the cloud. But real-time applications will probably not end up in the cloud because of the latency.
[Operator Instructions] And we have no further questions at this time. Please go ahead.
Thank you, and that was a very comprehensive Q&A session. And I thank you all for dialing in, and we'll do this again next quarter. Thank you, everyone. Bye.