Net Insight AB

STO:NETI B

Earnings Call Transcript 2019-Q1

[Operator]

Hello and welcome to the Net Insight Q1 Report 2019. [Operator Instructions] Today, I am pleased to present CEO, Henrik Sund; and CFO, Pelle Bourn. Please go ahead with your meeting.

[Henrik Sund, Chief Executive Officer]

Thank you very much, and warmly welcome to our Q1 report. Together, Pelle and myself, we'll walk you through an agenda, and we will start with some highlights, an update, financial report and then we will end with Q&As. The ones that have been with us recognize the agenda. So let's get right into Q1 at a glance.I am sure everyone following us is very well aware of that we finally received a very significant major proof point for Sye, that we are very proud of and we have been working on for a significant period to make that happen. And that, of course, leads us to, as we said last time when we explained a bit more our uniqueness, our perfect sync, low latency, broadcast quality and high volumes are giving us traction in the market. I will get back more in detail through these different highlights as well.We have launched Nimbra Edge, a cloud-enabled platform and a third-party open standardized solution, which clearly, our belief is, will give us an additional edge into the market. We have done significant evolutionary work on our ScheduALL product, which is deeply needed, and now we are starting to see good customer feedback even though it's a long journey to do the upgrade and this evolution to ScheduALL.We have anticipated in the largest remote production. We have talked quite a bit about Swedish television remote production outlook order. And it was -- has been the largest remote production with over 80 cameras live in that production. We reached a revenue of SEK 111 million. Unfortunately, our earnings were negative and they were at minus 6 with affecting comparability. So we're still in negative and we will get back to that, and Pelle will explain more later on moving into our financials.But this is the glance of Q1. So let's dig into the different product areas that we now have been looking and we have created, and I will also talk a bit about on how that traction is moving.So Sye. We finally succeeded to inform about the Fortune 500 company that we bought and rollout has started but in very, very slim numbers. And I want just to elaborate a bit of this because we have gotten a lot of questions around this customer of ours. And unfortunately, we cannot reveal the name and this is under very strict circumstances because this is crucial for their business. And if you look into the Fortune 500, you will see that we talk about maybe 5 to 10 potential clients and these clients, inevitably [ each one of ] that it would be our significant partners, potential partner of ours.And just to be very explicit as well, this is a program which is going on and it will take time before we will start seeing revenue out of this. It's quality, quality and quality, which is the most important to make sure when they roll this out. For us, this is a significant proof point that demonstrates exactly what we said is now gaining traction in the market, but we will have to wait before we start seeing significant revenue streams out of this.Primetime is growing. We've talked quite a bit our SaaS solution for Primetime. They have now rolled out to 5 different countries and this is, of course, in very close collaboration with our partner Microsoft and the Azure cloud solution.So we've had Primetime for some time, we talked about it, but now we also have the Fortune 500 reference. And these 2 proof points demonstrate that all the work that we've done so far has a significant impact in the market. This leads us to believe that by increasing investments in this area, we will be able to gain traction faster in the market. So we are now investigating this because we believe that these 2 proof points are clearly for us to gain market share going forward.So all in all, Sye, yes, we have shown that the market demand is there. Nimbra, our core top of our business -- is the core of our business and will remain core of our business for the foreseeable time. We have won a major American broadcaster for our still, I would say, new 1060 platform. Some of you might recall that the significant one last year was Asian games. This year, we have won Pan American Games together with a service provider, Aldea. We were very pleased to participate there. The games will be held during the summer, but it's a lot of work to make that happen before.We got the new corporate client, LinkedIn, which is, of course, a significant brand to put into other significant clients we had, and they will be building a remote production network built on the Nimbra. As previously mentioned, we have launched the Nimbra Edge, which is a cloud-based live media transport, and this is part of our portfolio in the cloud that has been missing that we have now launched and gotten very good traction when we talked about these 2 [ lot of ] clients at NAB and NAB being 1 of the 2 major shows during the year, which just happened in Las Vegas a few weeks back. And then we have also launched an open standard protocol for the media transport, which is that we have joined the RIST and the SRT Alliances. And that will make us much more compatible with third-party products, which is also a significant step forward to gain market share around our Nimbra platforms. So all in all, Nimbra is picking up and this is the engine of our business.Coming back a bit to this largest remote production event. Hopefully, you watched a bit on it and saw that it was a very, very high qualitative event, and this has gained a lot of attention in the media and broadcast environment because it was, by far, the largest remote production event. And when we talk about that, we talk about 80-plus cameras with an enormous amount of not only local, not only regional but global viewers. And this was built on our Nimbra 1060 network. What was unique as well was when we talked to the CTO of SVT, he clearly claims that there is no way they could have produced first the downhill in Åre and then the [indiscernible] and then the Biathlon World Championship in Östersund in the old way. So remote production was imminently important for them to make it happen. And this was also given quite a lot of attention at NAB because it was such a large production. Of course, it was fortunate that we had the fiber environment that we had in Sweden but this also means that going forward SVT will have much higher flexibility delivering these kind of solutions going forward. This is just one example, and I can assure you that we've had quite a few clients visiting us and talking to SVT about how to do this. Because remote production, we talked about for a long time and that has been a technology that's been working for a long time, but I would really say that now this is version 2.0 or even 3.0 of remote production.We talked about the product area ScheduALL, which is the resource, the intelligent resource optimization. And the more we talk to our clients, the more important it's really about our clients making sure they leverage their assets in a much, much better manner than they've done before, and this is what ScheduALL really is all about. It is about smart utilization of resources.And we have significant clients, the red carpet of the broadcasters, I would say, and this is now into an evolutionary path. We realize we have to upgrade. We have to do result of modernization of ScheduALL. And initially now we focus a lot on crewing, event management and workflow. Of course, making sure it's available on social media, on the mobile, securing that we leverage the analytics part and moving into the cloud, all of these significant technology trends in the market. And of course, as an IT company, an IT solution, product solution for media, we had to make sure ScheduALL is well positioned for that transition as well.The good news as well is that we have a lot of data and we can work with a lot of data insights from our clients. And we are building advisory services, making sure that our clients can actually leverage the existing data they have to increase their productivity and sweat their assets in a much more professional manner than they had used to do.We launched the new frames at NAV, showing where we will be taking and how the evolution of ScheduALL will be looking, and that was very well received both amongst our existing client base as well as new clients entering, having dialogues with us on how they can leverage the modernized ScheduALL.We are initiating a few proof of concepts with more permanent customers of ours, and this rollout of limited functionality for this modernization will happen towards the end of the year. Initial proof of concepts, they are happening as we speak but the growth in rollouts will happen end of year and during next year.So execution on plan, even though when we are not in black figures, we have done significant changes, which we've also communicated that we will [ go to north ] beginning of the year. We're focused on 3 very distinct product areas and these changes and the takeout on cost have been realized. Creating the product areas have built a lot more agility into the organization. We are much faster responding to customer demands, customer needs by combining sales from the product management, R&D and also delivery into the same product areas and quite a few very good responses was given at NAB as well. Now Net Insight is really moving again. You are much more flexible. You are much more agile. You are on to the point. We see much more innovation coming out of Net Insight as well. And I think that these kind of proof points made me feel very good getting back feedback from clients.So customer intimacy is, of course, key for our continuous growth. And then as I mentioned, developing the product portfolio in an agile manner, which will -- of course, was shown by Nimbra Edge. We have also -- had some other launches at NAB that have been well received in the market, and hopefully, that will be seen in figures going forward as well.So I think we are executing on our plan. Needless to say, we are not where we want to be, but let's move on looking into the financials. And by that, Pelle, will you lead the way?

[Pelle Bourn, Chief Financial Officer]

Thank you, Henrik. Looking at the main figures then, as Henrik said, revenue was SEK 111 million, which is on par with Q1 last year, and operating earnings, excluding items affecting comparability, minus SEK 6 million. Now these items affecting comparability is around SEK 5.5 million related to restructuring costs. We announced in January this year a cost-saving program, which carried some restructuring costs. That's the difference between the SEK 6.4 million operating earnings excluding items of comparability and operating earnings of minus SEK 11.9 million. It's worth noting that if we exclude in the restructuring cost and the operating earnings contribution from the Sye efforts, we do have a positive operating earnings for the other businesses of SEK 4 million. Negative operating margin, minus 11%, and a negative cash flow, I will come back to that. Looking at the 12-month perspective, revenue is around SEK 450 million and pretty much flat to CTC on the graph for the last few quarters. And as Henrik said, not where we want to be.Net sales per type. As you notice here, we now describe our revenue not only in the nature of income, mainly hardware, software, support and geographical region but also by core group. We feel this is important in explaining what we do, how our various core areas develop since there are different ramifications for these areas.Starting off with the hardware, software, support. We see a increase in hardware compared to Q1 2018, a decrease in software licenses. Now hardware is basically only for the Nimbra products and this kind of variation is typical. We do have a large number of existing customers with software licenses who from time to time buy hardware only. Software licenses, that's a Nimbra business and, of course, the ScheduALL business, both detract versus Q1 2018. And then support and services, that supports maintenance contract as well as training and professional services. Where we do have an increase, so coming up to the SEK 111 million.By product group, Nimbra is on par with 2018, slightly higher, whereas the ScheduALL business is -- had a weak quarter in terms of the licenses. And we do now record Sye revenue of SEK 2.73 million, 0 revenue in 2018 and then on a 5 -- sorry, 12-month basis, we are at SEK 5 million on Sye revenue. So modest, but I think as Henrik said, this is very positive, now seeing revenue here. Although that, just to stress again, the Fortune 500 customer is not going to make significant impacts on revenue growth for Sye in this year.By region, we see a large increase in Americas, 51% versus 37%. The single biggest item here is the Pan American Games deal Henrik mentioned. And Rest of World decreases with SEK 9 million here again. This is, Henrik mentioned, the Asian Games last year and we did not have the same games, of course, in this year. This is kind of normal fluctuation in geographies, depending on where the events take place.Our gross margin varies as usual between 70% and 75%. We're at 71.5%, which is almost 2 percent units lower than 2018. That's kind of normal variation due to product mix, and as you saw in the previous picture, was a significant mix variation if you look at the hardware, software and services part and that explains the lower gross margin in Q1 '19 versus previous year.Looking at the operating expenses at SEK 77 million. We see the increase of SEK 13 million versus Q1, considering the [indiscernible] this is what is happening here. We need to point out here 2 things: the items affecting comparability or restructuring cost, that's SEK 5 million in comparison to Q1 '18. We also do have a significant foreign exchange effect through the subsidiaries, cost base that's around SEK 4 million. So SEK 9 million of the increase is related to currency and restructuring items. Then we do have higher development expenses, SEK 7 million, primarily due to lower capitalization rates of the R&D projects.So all in all, we have a cost base which is in line with Q1 '18 and we will not see the same kind of increase of operating expenses between Q1 and Q2 this year as we saw in 2018.Our development expenditures, meaning the gross development expenditures before capitalization, increased slightly related to increased efforts in ScheduALL, as Henrik pointed out, where we do modernization of the solution. That is going to increase. In the graph, you see a significant variance of development expenditures between the quarters. The reason we can do this is we work with a considerable amount of external resources for our R&D projects. We bring in people to help us out short term, which enable us to increase and decrease efforts depending on sales and road maps for the various businesses, which is a advantage for us. Of course, that access to that kind of resource tool to be able to [indiscernible] is actually a strength of ours.Then to conclude the operating earnings, the SEK 2 million plus Q1 '18 minus SEK 12 million this year. SEK 7 million is related to increased development costs, which mainly is due to lower capitalization rate. We have one-offs, so the items affecting comparability at SEK 5 million. And then other, minus SEK 2.7 million. And here, of course, is also the FX effect, which explains then the road from SEK 2 million-plus in Q1 '18 to minus SEK 12 million in '19.Finally, cash flow was negative SEK 32 million in the quarter. Obviously, the operating earnings loss is affecting this but even more so the change in working capital. We do have an increase in change in working capital compared to the previous year than also previous year. We are focusing on working capital to bring that down. And as Henrik said, we're also focusing on activities bringing us to increase profitability, of course. Compared to last year, we will have investment activities related to our R&D, which continues to be high. But in previous year, we had roughly SEK 30 million in investment activities related to tangible investments in new offices, et cetera, and equipment, furniture, ITs, which we will not have in this year.And that, I think, would conclude the financial part. Henrik?

[Henrik Sund, Chief Executive Officer]

Thank you, Pelle. So if we summarize Q1, we are happy for the proof points in our product area Sye. The launch of Nimbra Edge was very well received. The evolution of ScheduALL, also good traction from client perspective and client feedback. We have participated in the largest remote production out of Åre and Östersund, together with SVT. The revenue at SEK 111 million, but the operating earnings at minus and was, of course, cash flow, et cetera, that Pelle mentioned is not something to be proud of. But I can assure you we are working hard on both the top line as well as cost base to increase these figures in a positive manner going forward.So by that, I would say let's leave Q1 behind. We are already in Q2. And by that, we are concluding and ready for questions.

[Henrik Sund, Chief Executive Officer]

And we have received one question. And that's, when do you expect Sye revenue from Ericsson UDN?And of course, we cannot respond on a specific client. We are in, as you know, constant dialogues with our clients and Ericsson is one of our key clients regarding Sye. But unfortunately, we cannot relay any figures around when this will increase. And eventually, there might be some from the audience as well, additional.

[Operator]

[Operator Instructions] And there are no questions at the moment, so I will hand the word back to the speakers for any final comments.

[Henrik Sund, Chief Executive Officer]

Okay. Thank you. As said, we will conclude Q1. We are focusing on Q2. But also, as shareholders, you are more than welcome to our new office in Solna for our AGM, which will take place on 8th of May at 10:00 a.m. So hopefully, some of you will come and visit us and we will talk more about the year that has passed and the way forward.So by that, thank you for listening in. And I can assure you we will stay tight focused on improving our figures in our business and definitely close eye on these great clients of ours. Thanks for listening. Bye for now.