Net Insight AB

STO:NETI B

Earnings Call Analysis

Earnings Call Transcript 2024-Q1

[Crister Fritzson, executive]

Good morning, everyone, and welcome to the Q1 report from Net Insight. My name is Crister Fritzson, the CEO of Net Insight, and together with me tonight or today, I have Annika Muskantor, our interim CFO. So the agenda for today is the quick summary of Q1, and then we are moving into the media update and time synchronization update and then Annika will go through the financial numbers little more in detail. And all of you are -- can send in questions that we will answer in the end of the call. So if we start with the Q1 then, after a record Q4 last year and the record year in 2023, we are starting very strong in 2024. We have continued revenue growth in Q1 and by winning a number of strategic customer in media, which definitely give us a very strong position in the market, and it shows that our investments in product and in our organization has driven our IT product and the time synchronization portfolio that we have. And we have been very, very successful so far with the product, and it's still really good proof when we have the Mobile World Congress in Q1 for the synchronization product, and we have just finished up the NAB show in Las Vegas last week [indiscernible] media, and we have had really good response from the customer. We have broadened our cloud portfolio and launched a new product that we call Connect iT, and we had delivered Zyntai to existing and new customer during the Q1. That was the short summary of the Q1. And I'll continue a little bit into the summary of the financial numbers. We can see that the net sales amount to over SEK 142 million compared with last year, SEK 126 million, and that's an increase of 12.5% year-on-year. And this is the 14 consecutive quarter with growth. I think that's been very impressive. So we have more or less over 3 years have continuous growth in the market. We had an operating margin that is just close to SEK 11 million compared to last year SEK 12 million. And if you adjust for items affecting comparability and currency differences, the amount is close to SEK 16 million compared with just over SEK 13 million last year. I'm glad to see that the pipeline is still strong for the Zyntai product, and we ended the quarter with a pipeline of SEK 195 million. It's the same level as we had in the end of Q4. So we have a strong order pipeline still. And as you can see in the report, we have shipped Zyntai product around SEK 10 million in Q1. [indiscernible] has continued to do the [ update ] on media. As I say, we continue to grow, and it's great to see that we see that our customer -- existing customer continue to invest in our products and then continue to invest in the IP-based solution that we have launched in the last 2 years and is an easy investment for -- investment for our customer because we are agnostic with IP and our MSR platform. So the customer can gradually move into the IP solution without replacing all equipment in the networks, which means it is a very efficient, easy and cost-effective way for the customer to continue to invest in new feature and functions, and IP solution that we have launched. Yes, I think that's definitely demonstrated our success in strength in our product portfolio in IP cloud that is a growing part of the market. And it's a technology move forward to IP, and we see that it will continue many years from now. As I mentioned earlier, we have launched a new IP product and IP is our cloud-based products. And we see it in the steady increase in demand of the cloud-based services, and we see a number of customers will [ know ] the cloud services. Even though that's in the first phase of launching or adding a new platform and new network for our customer, which is the cloud. And the product that we have launched is like an easy way for customer to enter into the cloud products. So the ease of first step in is take like a few minutes to launch that product, which means that the customer can gradually move, gradually increase the capacity, gradually learn how to use the cloud, and we see that it's a very good first step for the customer. When they then see an increased demand for capacity or they will extend feature and functions that can easily move to the existing Nimbra Edge product. And it's a seamless transition. So they don't need to reinstall or change. They can easily move over, and we had a very high demand for that product, and it will help our customer to gradually move into the cloud business. We have also launched a new gated product that connect well into our cloud product. It's an Internet media transport product that we have launched. This is on the -- in the 400 CRU product platform that have been upgraded and those 2 in the NAB last week in Vegas. And that connects well into those the Edge products that we have and the Connect iT as well will support our growth in a cloud space. And we have a long-term engagement with our customers and the customer lifecycle, I will just try to describe how the lifecycle looked like because it's a very interesting stable and our customer can gradually grow very easily with our products. Normally, it starts with a hardware installation for the customer. That is the first step. We call it the [ rack ], which means that you can add more [ costing ] to the rack and install more software while you expanding. And due to this is the customer can gradually increase capacity, feature, and function and it's like software based. And normally, the software have a higher margin than initially the hardware first phase. So the installation of hardware is a little bit less margin, but with, of course, with the software that the customer will add on have a higher margin. Additional to this, we have also a revenue stream coming from support and software licenses that normally is like an annual agreement or up to 3 years agreement that we have with the customer.That's the normal way of doing it. So it's a quarterly base invoiced, and it's normally 1 to 3 years contract that we have with the customer. And we can see that the new features that we have launched like the IP-based features that we have launched is based on our existing hardware platform. So when a customer would like to move over to the IP, they use the exact same hardware equipment that they have bought previously. Even when we double the capacity on the 1060, it's a software upgrade, which means that we can have a very long term engagement with our customer. And of course, it does give us a very solid position with the customer because the investment going forward for the customer to invest more in capacity features can stay with us. They don't need to move over to another competitor. They can easily continue with our products. One of the growth initiative that we have is really try to capture new customer. That's one of the focus we have when we now have launched a new IP-based solution is to [ grab ] new customers moving into new market segments, and we are glad to see that we have several new customers, large [indiscernible] customer in Q1, both in Europe and in APAC.One is in APAC is a large national wide network. And it's great to see that they have selected us after an extensive testing and comparison with competitors, and we were coming out as the winner. And it's based on our IP solutions that we have [indiscernible] launched, and it's still really showing that we have the right product, function, and features, and we are very competitive in the market. And we're also glad that we have with our partner, DMC in Denmark, yet install or we are on the way of install a network in Denmark, [indiscernible] supporting the Danish Football League and its remote production installation that we have done. For the Nordic region, we are extremely strong with those in Sweden and Denmark. We have ice hockey in Sweden, we have football in Denmark. We are well positioned in the Nordic area and give us a good long-term revenue stream from those customers. Then moving over to the time synchronization. As you know, we have -- the Zyntai had developed and launched as planned. And the rollout of Zyntai to existing and new customer had been going on in the first quarter, and it's going -- it's on track. And we're glad that we have secured another customer in Nordic, Denmark is the operator 3 that have start already in Q1 to take delivery from us and installing that in the 5G network in Denmark. We have, as you know, established resources in the resources in APAC, and they are based in Singapore. And through that increase of resources, we expanded or we have launched new proof of concept in the APAC region. We have also expanded our presence in India, one of the absolute most interesting telecom market in the world, and we have resources based in India that, of course, can support from head office, but it's important to be present in that market to be able to be a strong player in the market. So India is one of the move that we did in Q1 and increased resources into that market. As it is right now, we have more than 5 ongoing [ talks ], and it's primarily used now Zyntai. A few of the existent [ POC ] that we had from last year have now moved over to Zyntai. The order that we received through Geartech for a leading operating in Canada and pilot order, they have moved over to Zyntai in Q1. That's just an example of the customer that we have that now [ rolling ] on with Zyntai from our old product, which is for more a media product that we used last year. And that gives us, of course, a much better position. And hopefully, we can move more quicker and faster forward with the customer when they have the final product to test. We are also planning to expand our proof of concept during Q2, and we are planning to start 3 to 5 new [ PUCs ] during Q2. As you probably have seen, we have commercially launched our product at the Mobile World Congress in Q1. And it's -- I'm glad to see that we have a strong market presence right now that we have like been able to communicate our product and our uniqueness in the product. And we had a number of business driving customer meeting during the Mobile World Congress. As we have communicated earlier, we are now planning to start standardization of products, Zyntai or TimeNet technology in -- through the [ ITU ] and that's moving forward as planned. I hope that you have seen the 5G magazine article that was produced or sent out or issue in Q1, really showing the Swedish model. The Swedish model are like being a way of communicate how the Sweden have done with time synchronization that the regulator is putting demand on to the operator, the telecom operators to have an alternative GPS synchronization. And we see a lot of movement from the regulatory bodies to push higher pressure on to the telecom operator to have an alternative to GPS. And we see that like in Europe, Northern Europe, Nordic is affected all GPS jamming and we definitely see it as well in the Middle East and other regions that are affected of GPS jamming and that, of course, also affected 5G network. So that's like a push and give us a much stronger position and increase the awareness among the operator that it's an issue to using the GPS because it can affect the network, and we see that the operator have communicated that they have a problem with the network and in sometimes even in that get severe problem. And in some areas, it's going down. So that's something that really are pushing our product and the Swedish model is something that has been communicated and many of the different countries are trying to adopt that same model in the region, in the country that they are operating. I think I'll stop and hand over to Annika and please hand in question if you have, and we should try to answer as many as we can.

[Annika Muskantor, executive]

Thank you, Crister. I'm pleased to have the opportunity to walk you through the Q1 financials. So let's start with net sales. So net sales grew to SEK 142.5 million to be compared to SEK 126.6 million in Q1 of 2023, which corresponds to growth of 12.5% as reported, as Crister mentioned, and that is equivalent to about 12% on the currency adjusted. That means that the last quarter is the 14th consecutive quarter with year-over-year growth and resulting in a rolling [ forward ] quarter growth of 16.9%, i.e., exceeding organic growth target for rolling fourth quarter that was set to 15%. As Crister already said, the growth is driven by orders from existing as well as new customers in media as well as from the newly launched Zyntai offerings. Moving on to operating earnings, where the reported operating earnings for the quarter amounted to SEK 10.6 million, which is as reported, slightly below the SEK 12 million reported for the corresponding quarter last year. However, excluding items affecting comparability and foreign exchange rate differences, operating earnings amounted to EUR 15.8 million for the current reporting period that should then be compared to SEK 13.3 million in Q1 for 2023, which is actually an improvement of SEK 2.5 million. So in operating margin terms, that translates to a reported operating margin of 7.4% and an adjusted margin of 11.1%. So to make a like-for-like comparison, the 11.1% should be compared to 10.5% in the first quarter of last year, i.e., both in the range of fluctuations seen in previous years and contributed to a rather steady fourth quarter rolling margin, as shown in the report and on the slide. Let's talk about operating expenses that in total increased to SEK 72.2 million from SEK 61.8 million in the comparative quarter in 2023, which correspond to a reported increase of about SEK 10 million from last year or about SEK 7 million when adjusting for nonrecurring items affecting comparability. For the change between quarters to make sense, we need to look at individual items on OpEx. So let me try to shed some light on that. So a [indiscernible] sales and marketing that amounted to SEK 41.3 million to be compared with SEK 35.5 million last year. That is an increase of about SEK 6 million, which is almost in its entirety attributable to the strengthening of the synchronization and investments in cloud and IT expertise, i.e. [ for ] the organization. Administration then amounted to SEK 17.4 million to be compared to SEK 15 million last year as reported. However, when taking a look at that on a like-for-like basis, administration has remained almost constant if we adjust for the majority of the variance, which actually relates to an accounting driven revaluation that has a corresponding counter posting on net financial items. So with that said, all in all, that means that what looks like an increase in expenses on OpEx has basically no material effect on net income. The tail end of the projects discussed in Q4 relating to such items as the successful installation of the ERP system, startup of the ESG reporting and recruitment account for the rest of the variance, which brings us to development that has also remained constant when adjusting for costs related to the relocation of development from the U.S. to Sweden, [ the move that we decided to finish with the lower future ] rise of operations. So now on to -- from development expenses that needs to be viewed in the light of the combination of CapEx and expenses for the period. So if we take a look at development expenditures, which amounted to 42.2% and is an increase of about SEK 6 million. Again, from that, you have to deduct the same SEK 2.5 million that was a one-off cost for the relocation from the U.S. to Sweden. And basically, the main part of the remaining variance relates to timing difference in sourcing for components for R&D, really leaving a really minimal variance when compared to last year. Hence, with that, we can conclude that the increase is mostly attributable to secure and future competitiveness and growth over time. I would like to talk about my favorite topic, cash. So if we -- if I can turn your attention to the cash flow, where we can conclude that the cash and cash equivalent at the end of the period amounted to SEK 252 million to be compared to SEK 266 million on December 31 in 2023 and SEK 278 million at the end of Q1 in 2023, we can conclude that the total cash flow for the first quarter amounted to minus SEK 15.1 million to be compared to minus EUR 29.9 million in the last quarter. If adjusted for share buybacks, the cash flow for the first quarter amounted to minus SEK 6.9 million to be compared to minus SEK 21.4 million. Now where the change in the quarter is basically driven by improved cash flow from operating activities of SEK 25.4 million in the quarter versus SEK 7.3 million last year, where the change is mainly attributable to a change in working capital, as you can see there, with SEK 1.8 million compared to minus SEK 24.5 million. And basically, if we take a look at the balance sheet that relates to reduced levels of inventory and liabilities, partially offset by increased receivables and all in all, driven by timing of orders, which leaves us with change in investment activities of minus SEK 29.6 million versus SEK 26.2 million last year, both mainly attributable to capitalized development, as discussed just a slide back. And financing activities, they are basically constant as reported at minus 11, including in this case, share buybacks of owned shares of SEK 6.9 million this quarter and SEK 21.4 million in the corresponding quarter last year, and I hope that sheds a bit more light on the figures in the report. So with that, I hand back to you, Crister.

[Crister Fritzson, executive]

Thank you, Annika, and then we are moving over to questions. We have a number of questions. Some of them, I think we have already answered in the presentation. So let's see. Yes, we have [indiscernible] questions around the POCs, and we reported a number of POCs that we are ongoing and what we are planning to do in the Q2. And as we're communicating, it's moving all now to use the Zyntai product instead of the old media product that we used last year. And I think Annika was describing the cost, which can attribute to sync in the presentation. We had a question on the product mix within the Nimbra family. And as I've mentioned, we are [ yes ] launching a new product in the Nimbra 400 family, an automated product, and we still have like [ 600 and 1000 series ] And the main 2 drive products that drive the business is the 1,000 series and the 600 series. The 600 series is the volume product and the 1,000 series is very large capacity and density and a number of features that you have [ for build a larger ] network. So it's the 600 and 1000 will continue to drive the business through the year, but also, of course, in upgrading the existing base of products that we have in the market. We use software features like IP that I had presented that will also, of course, drive the business going forward in the next coming quarters. So we have like a very good like a balance between [indiscernible]. We use software functions that the customer are upgrading the existing network with. And of course, the aim that we have to gain new customers as we did in Q1 with 3 [indiscernible] that we discussed, that we launched. It's a balance between new customers that we are trying to grab with we would like in the market and continue to use the new product to upgrade existing network that we have because we have a huge installed base in the market. We try to explain the difference in hardware and software. And in the first phase, as I mentioned, it's like the hardware sales initially and then it's the software coming like rolling after the first installment of the hardware. And how big is the difference? I mean it's hard to see exactly the differences between the hardware and software, but it's a substantial difference between the hardwares margin and the softwares margin definitely. But we haven't communicated the exact numbers like adding now -- previously, we have as a support fee for our product, but we are dividing them up in support with this hardware support in 24/7 and services that are the license fee that you have, and we have an increased base of software. It means that the support fee for services will increase going forward. So that's something that we have pointed out in the new business model that we are using. We had a question around the project cost and admin cost. And I think that Annika really described that well in the presentation. So I don't think we need to go into that more deeply. And you can find the numbers in the report and also the presentation, you can look into after the call. Yes, the time sync order book is flat. Yes, correct. It's flat from December, but you should also take into consideration that we have shipped product during Q1, which means that we have increased the order book, of course, with the amount of the shipment that we have done during Q1. So that's flat. [indiscernible] It is exactly be the flat, but that's the case. Yes. I mean it's -- I have a question around the Zyntai and the rollout. I mean it's -- to roll out a national network and install product in 5G network takes time. And it takes time to plan and thoroughly need to have all the resources ready to install the product into the network. It takes time to launch for the network. And we see the customer in Sweden, they will roll out the network during the year, the telecom and the [ 3 ]. So it takes time. Even though that we have like close to SEK 200 million order book, it will not be delivered immediately. It will be through overall quite over time that we will ship that into the market. The competitive environment in 5G and synchronization -- we don't see a similar product as we have in the market. So we have a unique position in the market with unique features that no one has been presented an alternative to. So we have a very strong position in the market, and we have a number of operators, as I've described that are real testing our product and see the benefits. So still, we have the same strong position in the market, not changed, as we can see right now. And I think one thing that is really important that we're going through and we have seen positive reaction from the stabilization of our technology that will give us like a good stance. And already when we are into that process that we have colleagues in the market that are working with us to do the stabilization. Both operator and hardware suppliers are into that processes and work together to do the stabilization of the time-synchronization technology. So we see that it's an important step forward for us really to have that [ stand ] ready and is going according to plan. Okay. I think that was the last question. So thank you for listening. And if you have an additional questions, you can of course forward them to me or Annika. So see you in July then again. Okay. Thank you all for listening. Bye-bye.