Micro Systemation AB (publ)

STO:MSAB B

Earnings Call Transcript 2020-Q1

[Operator]

Ladies and gentlemen, welcome to the Micro Systemation audiocast with teleconference Q1 2020. [Operator Instructions]Today, I am pleased to present, CEO, Joel Bollö; and CFO, Dr. Ferm, Speakers, please begin.

[Joel Bollö, CEO & President]

Hi. And welcome to MSAB Q1 financial report for 2020. My name is Joel Bollö, I'm the CEO for the company, and it's me that's going to do this presentation for you today.Next slide, please. A short company background. MSAB is a leader in mobile forensic industry and we were founded in 1984 in Sweden. Today, we are a public listed company, the trusted partner to law enforcement, military and intelligent agencies in more than 100 countries. We are 100% focused on mobile forensics. And today, we pioneer the mobile forensic industry. Our vision is to help to solve more crimes and create a safer world by providing state-of-the-art mobile forensic solutions and services, support and training and continuous development. Today, we are more than 200 employees spread around in 17 different countries.Next slide, please. Here, we see the result for the first quarter of 2020. Net sales amounted to SEK 66.2 million, which was almost exactly on par with 2019. Usually, we do not talk about received and booked orders. But due to the circumstances of corona, I can say so much that we have had a good amount of more received and booked orders for 2020 than we had in 2019. We could not travel the last 4 to 5 weeks of the quarter, and therefore, there was a good amount of orders that we could not deliver and recognize. The result for the quarter amounted to a negative SEK 8.8 million. We have had good cash flow during the first quarter. The cash flow amounted to positive SEK 9.2 million. Under the circumstances, we are, I believe that the expression cash is keen is more valid than ever. So for being one of the slowest quarters and the fact that we couldn't recognize all orders that we received, I think the result was pretty okay. Next slide, please. In this diagram, we see a little bit of sales and what the sales consist of. On the left-hand side, we see the split between new sales and renewals. It shows the strength in our business model. We have had good revenue stream, both from new sales and renewals. The new sales were higher than last year, while renewals were slightly lower. The case is not that less customers renewed their licenses, we simply had fewer licenses to renew this year. This is due to customers sometimes renew or buy new systems with a license period for more than 1 year at a time.Please move your eyes over to the diagram on the right side. In this diagram, we show the split between new sales, and it's impressing to see how strong our core product, the office version is. It continues to sell even more. We have invested in new staff to improve our offers. The increase of new sales in office is an outcome of those investments. I'm impressed how we performed in training for the quarter. We sell and recognize more training than we did last year in Q1. How can that be impressive?Well, we have not been able to perform in-person training for the whole March. We could have recognized significantly more trading this year compared to last if we would have been able/allowed to travel. We do not sit still and wait for things to happen. What we do now is switching over the training to more and more online and on-demand training. Even Frontline is impacted of corona issue. We have had a good response after started shipping the new Kiosk Mk III. But in several cases, we and our customers travel restrictions have limited us to do installations of these solutions. So we will see that there will be more of Frontline and training when we can start to travel again.Next slide, please. On this slide, we see the split between the sales over different regions. We have had a good spread of our sales. All regions as the company on a whole performed close to last year. North America a little less, while EMEA is slightly more, while Asia is almost on par. The global organization we built up during the last decade is now paying off. It would have been very difficult to maintain our business if we hadn't invested in our global organization. We can sell support and maintain our customers' licenses, especially under these important circumstances.Next slide, please. Now looking more into the detail of the financial for the first quarter and running 12-month perspective. Starting with the top line. Sales for the quarter became on par with last year. And for the rolling 12-month perspective, growth almost became on target with compared for the corresponding rolling 12-month period.Looking at cost of goods sold, and more specifically, on gross margin in percent. In the quarter, we continue to have a strong gross margin ranging above 90%. Our normal average product mix should take us above 90%. Large volumes of our Field Version solution is what can affect the gross margin.External cost, representing mainly our direct marketing costs and overhead, is stable for the quarter, slightly lower due to a little less training and traveling in March.Operating margin in total is lower for the quarter. The main reason for that is increased headcount. That increased headcount represents deliberate investments in our organization to stimulate further growth going forward, demonstrating the high cash conversion that our business model holds. Cash positioning at the end of the period was SEK 71.5 million. Very solid considering we, during the 2019, paid a dividend of almost SEK 40 million.Next slide, please. MSAB is not dependent on the seasons in the sense that is normally meant by the term seasonal effects. However, most of the company's customer have a purchasing pattern that follow their budget period. Budget periods differ between regions all over the world, but most follow their calendar year and end of 30th of September. This has historically been reflected in sales in such way that the second half year is stronger than the first half. Moreover, senior larger orders will have an impact in that very quarter. All combined, we, therefore, strongly advise investors to view the company longer perspective and not in individual quarters. The above graphs illustrate this quite clearly. As one, on the left-hand side, you can see individual quarters with large variations, but on the right-hand side, we see a year-over-year perspective, we see a quite steady, consistent profitable growth.Next slide, please. Here, we see a little bit graph over how our business model is working. Let me try to explain a little bit how it works. I mean, when we sell the system, it's both a package with software and hardware. As we saw on the previous slides, we have 90% -- over 90% with the gross margin shows that it's the software that is real value what we are selling. I mean products like Kiosk, Tablet and Field Version that installs both software and a little bit more hardware. After a year using the product, customers pay recurring fee or license fee for maintain and update of the software. Normally, they buy it in 1 year, but there are customers also buying with a 2- and a 3-year license period. The one, I think you should pay attention to most in this slide, is the dotted line, which shows the steady growth of recurring revenue, and approximately over year more -- approximately 50% of our yearly revenue is recurring license fees. And of course, our goal would be in the long term to make sure that the recurring license fee would cover the fixed cost for the company. We'll see if and how we would get there.Next slide, please. Yes, now we're leaving the financial part of the presentation. I'm going to do a little bit talk about the market and the space we're acting in. Here we see a plane with an engine on fire. And I would say, analogy to say that this is a little bit where we see the world today. No one that is working today have been in the situation as we are now with limited able to travel, working from home, not even need -- or able to walk outside your house. So when I do this analogy with the airplane with an engine on fire, I would say that's the world. So what is happening if you were a pilot when you were flying with an engine on fire?Next slide, please. Well, the first thing, the pilot asks themselves when they ran into a situation with an engine on fire is who is flying the plane. Because there have been accidents actually with airplanes, having engine on fire, where both of the pilots have been so focused on the engine on fire. So they have actually crashed, not that they necessarily would -- shouldn't happen, but it happened anyway. So the first thing we said, I said, when we -- when the company or the world came into the situation of corona lockdown is, okay, who is flying the plane and who is taking care of what corona impact has on the company. And I think we fly the plane very good. We do -- as we saw in the figures previously here is that the company is doing good even under these circumstances. So if we keep the analogy with the airplane, I would say, MSAB is flying the plane safely, and we even increased the speed a little bit. So we'll see what the future comes up with. But so far, I would say it has had impact, but maybe not as much as if it could have if we did not adopt to the challenge as a company.Next slide, please. So more in detail what impact have corona had on us and our company for the first quarter. Well, we had more orders in Q1 than we were able to deliver due to corona and travel restrictions as I said before. And -- but that said, we do not reschedule any meeting. We just relocate our meetings with our customers. So we use a lot of Teams, GoToMeeting or other type of technology that makes it possible to get in contact and trade and do whatever we need to do necessary -- need to do with our customers. That has given us the good result that we saw in Q1. But we continuously look into how to improve ourselves during these circumstances. And if we do it right, I think we can learn a lot that we can take with us even after this corona situation have been released.Next slide, please. So here's a great example of how -- what we've done to adopt to the challenge. We need to be adoptive. Running a business, creating a safer society means that what we do, we do for real. As rest of the world, our customer situation and work has been impacted a lot, more in some regions than others. We are very close with our customers and it did not take us long until we understood what one of their most challenging issues were, and that was to trace corona-infected persons whom have done what, been in contact with, et cetera, to limit the number of citizens being infected. Innovative as we are, we created a special kit for this demand, the MSAB C.A.R.E. kit. C.A.R.E. stands for Cellphone Analysis and Risk Evaluation. This package can make a big difference, not just now but also for the rest of the year or how long this lockdown will last. But even when government starts to release the restrictions, there will be demand for tracing whoever has been infected. What differs the MSAB C.A.R.E. system from alternatives is that this is not a mass surveillance solution. This is more targeted precision work. If customers, for example, need to know where someone has been traveling previously, the word of mouth through governments have already helped us spread out the good news that MSAB C.A.R.E. is shipping ready system to be used and to make us safer from the coronavirus.Next slide, please. We have already announced that we have a new Mk III Kiosk coming out. And now we're also shipping. The response have been phenomenal, not only for the reason it's looking very nice on the outside, we also have implemented a much more easy-to-use, step-by-step software. So even if it was easy before, now it's even easier to start investigate phones for a much broader audience than just the forensic labs. Safety and integrity is a leading word for MSAB. The new Mk III Kiosk is no different. Not only that it performs 50% better, it has maintained the high safety features as previous versions. The unique XRY encrypted file format, together with a number of other safety features, make it probably the fastest and safest Frontline solutions on the market today. During the quarter, we have one great agreement that stipulate that we for several years will deliver this new Mk III Kiosk to 7 important regions in U.K. We expect other markets to follow the great U.K. example of investing in MSAB Frontline solutions. I am convinced that U.K. police forces' outstanding performance when it comes to crime solving rate is a direct consequence of the investments they have done in Frontline solutions in general and more specific in MSAB Frontline solutions.Next, slide, please. As you saw in previous diagram of new sales, the office kit continued to show strength. It does it for a reason. We constantly continue to improve the performance of its capabilities. I'm proud to see that the product that addresses one of our key target users, the forensic labs, continued to perform. We have a record high sales of MSAB Office Kits in Q1. A lot of investments we've done is to improve the Office version. The Office system is a cornerstone in our ecosystem. The more customers using our Office as their primary tool, the greater our Frontline and examine sales will become. On this picture, you see the nice and new way we packed our Office Kit. A high-performing software deserves to be delivered and stored in a top-notch and high-quality box.Next slide, please. Here's an example of what I mean improving performance in Office. Last week, we launched a significant improvement of our capabilities for iPhone. MSAB Office system can now secure and get more data than ever in iPhones even with the latest versions of IOS. The exact capability. We have tens of thousands of different phones we support is changing all the time. During a normal year, we add support for several thousands of new devices, apps, and profiles. MSAB had created what could be termed as a factory that creates support for all the latest and greatest phones and apps. And believe me, it's not an easy task to do it, but we have made it.Next slide, please. To give you a short update on this European Union project that we are the only industrial partner in the -- for Mobile 2020, which has a task to make a complete end-to-end forensic investigation chain targeting for mobile devices. We continue to work close with this group of people and impact what's going to be the future standards for investigating mobile devices.Next slide, please. Last but not the least, I think it's very important to maintain the good relationship and support our customers. If we continue to support our customers the way we do it, and I've shown examples during the presentation today, not only through improved support for the important iPhones but also with the C.A.R.E. system, they're going to continue to make the safer world for all of us, and they're going to maintain their licenses and increase their demand for MSAB products.Thank you so much. Now it's time for questions. Thank you.

[Operator]

[Operator Instructions] And our first question comes from Viktor Hogberg from Danske Bank.

[Viktor Högberg, Analyst]

So I have a question on the deliveries that you were not able to make in Q1 that you -- due to the travel restrictions. In the report, you said it was around 10% more you could have delivered. Is that in terms of trading revenues or in terms of total revenues? Just to get the potential magnitude for later quarters.

[Joel Bollö, CEO & President]

This is Joel. Well, I would say that the total revenue would have been 10% above where we are today as on what we report today. That's what I'm saying.

[Viktor Högberg, Analyst]

Okay. And in terms of the renewals being slightly lower, is this an effect we should expect for the rest of 2020 as well? Because we have no insight in the license durations that you've signed historically or be it 1-, 2- or 3-year licenses. So was this an effect -- was seen in Q1 solely? Or what do you expect going forward in terms of the license renewals?

[Joel Bollö, CEO & President]

It's a good question. No, this is more of an exception. I would not expect to see this for the rest of the year, it's more of a one specific case during Q1 last year.

[Viktor Högberg, Analyst]

Okay. Okay. And also, could you talk about what you see in the market? I know this is a very special situation, but have you got any indications on the potential uptake long term for your solutions which we've been waiting on for a couple of years now? You've been building and continue to build the organization. So I would assume that you have not seen a change on the negative side. But what do you see on the demand side?

[Joel Bollö, CEO & President]

Well, it's a good question. I think the uncertainty of the future probably haven't been larger than it's now. But that said, we are -- I mean the first reaction when everything was shut down also, of course, okay, how do we adopt this, what do we do, customers were not even aware what's going to happen in their own -- inside their own organizations. But quickly, I would say how fast we adopted to this new situation, and as I said in my presentation, we have a saying that we don't cancel any meeting, we just relocate them to digital instead of live to the extent of the customer to accept that. But the acceptance has been much greater than we thought and customers all realize that there's so much you can do online through different technologies today. But what we see a little bit from our customers is that their work has changed due to this new situation and also priorities and priorities for police forces, and I can say globally now is -- people understood. So they prepare also for if a lot of police officers getting sick, people who should be in office needs to go out. They are also in many countries working half time home, half time in the office, so they don't infect each others. So the impact it could have on us and that we see some of the new projects going on is being delayed. We don't see that they don't have demand for it. I mean there's cellphone involved in other type of crime. And I should say maybe even more, it's more of neutral. But decision-making can take longer time due to internal processes changing temporarily, I would say, within our customers -- to our customers. Was that an answer to your question?

[Viktor Högberg, Analyst]

Yes, sort of. If you can move on to the second part of it, the project delays that you talked about. Several projects that have been delayed, which, given the circumstances, might not be a huge surprise. But could you say something about the magnitude of these projects? Or is it like ongoing business as usual or the potential of these -- yes, some background or the potential of these projects that are delayed?

[Joel Bollö, CEO & President]

I mean, we don't -- I haven't given -- I can't give you any numbers on these. And it's also different phases. I mean, it's all over the place because it's not that the customers are risky. Let me try to sort it out. We have some projects going on well, moving on. We have some projects going on where we see risk for potential delays, but it's not expressed, specifically from customers. But the customers like, oh, yes, I need to wait for this person to come back, we can't have a meeting now because he's sick or -- so those, it's not like it's moving on or it's exact delay. And we just foresee that things that happen in some places maybe also happen in others. But the only good one, I must say, we are doing great, customers are focusing on improving their organizations as well. So it also could be that in the best case scenario, we get very little or not so much impact at all from this. It probably will. But the dimension of it, it's -- I don't know. I don't have -- I wish I had, but I don't know that as of now.

[Viktor Högberg, Analyst]

Okay. And if we were to look at the competitive side, we've seen -- I've seen reports of Cellebrite furloughing up to 10% of its employees. What do you see here? You did not announce any cost savings program or something like that here in connection with the Q1 report. What do you see in terms of the costs for this year if things could drag on for longer than one would hope? What do you see in terms of what you want to do on the cost side? Are you going to keep expanding the operations? Or are you going to pause that for a while or even shrink it? Or what do you see?

[Joel Bollö, CEO & President]

I mean, this is a question that we need to be very, very sensitive and adaptive to what's happening. We're monitoring -- I mean, as also maybe even more detailed what businesses we think we're going to bring in, what businesses -- what's the status of different cases are. And this is also absolutely related to how much we -- the cost we have -- I mean, we already have looked at all cost savings that we could do without laying off staff, I would say. I mean, I think this is a good way of doing that all the time, but a little bit more now. We haven't had so much cost saving in Q1 as we probably have in Q2. I'm talking about travel expenses. I'm talking about trade show expenses, which is a significant cost or at least a good amount of money that we spend on that. Many other trade shows that we couldn't perform was already prepaid, and these trade show organizations or the organizers of these trade shows, they are tricky sometimes because they choose to postpone the trade shows instead of canceling it because if they cancel it, they have to send back the money. So if everything is going to happen as it looks now, probably everyone knows that every trade show can't happen in Q3, that's been postponed now. But that said, I mean, I wouldn't think twice to -- if we have to, we also need to downsize sort of the company, but we don't see that as of now.

[Viktor Högberg, Analyst]

Okay. Could you -- do you have some comments or some take on the potential effect long term from the proposed Earnings Act in the U.S. that are making rounds in -- it's yet to be voted on and it has not passed, but with potential effects on end-to-end encryption and some of your customers might get the -- in the U.S. and would get the information they would want through other means than extracting it through your tools if it were to come into place? So what do you see from that? Or is there a concern or not?

[Joel Bollö, CEO & President]

It's not a concern at all. There is already something called warrant, warrant is something that law enforcement get from -- getting data from businesses or clients after a court order. We can already process those warrants because the warrant is justified. And this is a little bit the same as when we discussed -- when the discussion came about, everything is going to move to the cloud, what you are going to do with your device then. But you have to remember that there's a lot of information on device that's not stored in the cloud. Just to give you a few -- stored anywhere other than in the device. And that is sort of location data that is nickname. So related to numbers and the name related to numbers, which is not stored anywhere else in the device. Pictures taken that have never been maybe uploaded or downloaded. We take a lot of pictures that never sent back and forth. I can go on. So there's a lot of information. I don't foresee cellphones for a foreseeable future will run out of intake at all.

[Operator]

[Operator Instructions] There appear to be no further questions, I'll return the conference to you.

[Joel Bollö, CEO & President]

Okay. Thank you so much for listening in. If there's no questions anymore, I will hang up now. And thank you for listening in.