secunet Security Networks AG

XETRA:YSN

Earnings Call Analysis

Earnings Call Transcript 2022-Q3

[Axel Deininger, executive]

Welcome, everybody, to today's call on the numbers on September this year. Let me start with a couple of key takeaways, and then the CFO, Thomas Pleines, will take over to guide you through some financial details.

Key takeaways. As we expected, this year will be a tougher year than the previous years. I think we still saw a stable revenue of EUR 213 million with a solid EBIT line of close to EUR 24 million. It's below the last year's level, but I think still on a very good level considering the fact that we don't have special effects what we've always seen. There were 2 effects, corona based high order income. I think this year, we are going back to normal, which is not on that high level, but I think still on a very good and very competitive level.

We still see a positive business momentum overall. We have a good order situation still in hand, where I think we can profit from the next couple of quarters. So we also confirm the full year guidance with expecting a very strong Q4 with a revenue of around EUR 320 million. And we are shooting for an EBIT towards the end of the year of EUR 50 million, which would be very solid numbers, considering the overall circumstances and considering the fact that the special effects are over, we still see a very, I think, good profitable situation.

And with that intro and key takeaways, I would like to hand over to Thomas, who will give you more insights into the financial details.

[Thomas Pleines, executive]

So hello, everybody, from my side. We will start with the group level numbers. So we reached EUR 213 million in revenues and around about EUR 24 million in EBIT. As Axel said, it's, compared to the last year, related to 2 special effects, one in the public sector, it's pandemic-related additional sales, and one in the business sector, the high product sales from the rollout of the secunet connector. And as we declared last year, we did not see this effect in this year, so it's in line with our expectation that we are not running on a level from the year 2021. Furthermore, earnings are impacted by a change of product mix, so we are less in license business and more in hardware business, so that's had an impact on the EBIT line and on the EBIT margin as we expected.

Next slide. If we see the split between our 2 sectors, on the one side, the Public Sector, the main sector, who delivers the linear architecture, and the special appliances that make us very well growing business in last year that was not again in this year happened. So therefore, we have EUR 180 million in revenue and EUR 23 million in EBIT. And as in the history, the Public Sector remains the group's major revenue contributor.

On slide to the Business Sector, around EUR 33 million in revenues and EUR 1 million EBIT. Of course, as I mentioned, there was a deep impact from the e-Health business because the business is going down. We have 2 brilliant years in the past delivering the health connector. And that is something that will not happen this way in the next years. So we have to see that there's reducing of this business in our business sector. The contribution of this part of secunet is 16% compared to 18% in last year.

Nothing special to the slide of our share of the international business. It's around about 8% to 9%, so there's not a great difference between the year before, as you can see.

So cash position. As you know, we acquired a company called SysEleven for around about EUR 50 million. This was a big impact on our cash side. And of course, we have a special dividend payment, EUR 35 million coming out of the brilliant year 2021. And we increased our working capital because we have a lot of revenue to do in the last quarter. So we have to take care that we are able to deliver our workstation, for example. Therefore, our cash position is lower than the years before, but we see a recovery of this position at the end of the year 2022.

So for the outlook, I will hand over to Axel to give you some details what we can expect in the future. Thank you very much.

[Axel Deininger, executive]

Thank you, Thomas. Yes. On the overall situation and also on the outlook, what I said at the beginning, the order book remains, I think, on a high level, slightly reduced versus last year, but again, this is really without special effects at the moment. We have fully utilized development capacity, so we have also new stuff in the pipeline, and we also see additional growth opportunities and sales opportunities upcoming in the fourth quarter of this year. So I think overall, a very stable position we'll see in the market.

Focus for us is still, what we always said, sustainable profitable growth with a focus on the most effective IT security solutions. So we remain in our segment with the 2 acquisitions we did and we have broadened our space. I think there are 2 positive effects with that. We add to our organic growth and we expand our portfolio, which means we, I think, still support our existing SINA portfolio with more offerings. And of course, we address new market segments we were not able to address. So I think that gives us a better portfolio and a more solid situation on further growth.

On the Public Sector, still, of course, we are working very hard and are fully loaded with further developing of our SINA infrastructure and the core technologies. With the acquisition of SysEleven now, of course, we will address the secure cloud and collaboration area. And of course, the cloud business will take time. That's not an overnight effect we'll see, but we need to prepare, and that's what we currently do. We prepare a lot on the R&D side that we can also address projects when they are finally upcoming in the next year or in '24. So that's what we see a little bit more effort and maybe not that the revenue, but at the moment, we do a lot of work to prepare for the revenue growth, especially in the cloud area.

Business sector, again, next to the e-Health connector, we also developed further solutions for the e-Health market, which is always difficult because it's regulated. But I think also here, over time, well, we see some promising areas. We can also further grow and our target is still to become a significant player in the industrial IT and OT security area. Also here, the first project we have. We are fully loaded here on the business sector side with our consulting team. So that's where we are really good. But here also, we invest in future portfolio expansion technologies to see and to support further growth in the upcoming years.

International, the share didn't change a lot, but you see here also didn't reduce. So we were able, in difficult circumstances, to expand further our international footprint. We do that on a very, let's say, sustainable way. We are not super aggressive, that's right, but we see that as a further growth potential, of course. And the target is definitely to have a stronger footprint out there with double-digit percentage range in the overall revenue.

We have promising projects both in the EU and Middle East. And within NATO, we see also here future opportunities. It will take time, but you see here again, even within corona, we were able to grow our business there on the international basis. So overall, yes, we're expanding carefully our portfolio, and we address new market segments, not too aggressively, but at the moment it's also a lot of R&D work we do and investing in the future infrastructures.

Some selected key achievements. So far, with the 2 acquisitions, what I said before, we have expanded our portfolio to support both existing business, but also to address new business. But especially, I think for us, the key acquisition was SysEleven, because we expect the first opportunities upcoming now next to the foreign ministry, where we have already installed the cloud infrastructure. We'll see, also in the public space, first project upcoming next year or in '24, and that's what we're currently preparing our cloud infrastructure. So far, that was a very key acquisition to expand our portfolio towards the cloud.

We still have further developments on our core product, which is SINA Workstation S. So we constantly further develop that. We have to develop also new Intel reference platforms that are upcoming. So we follow standard road maps, expand feature print in our solution, and we see there also further growth potential. But that's ongoing work we always do. But here, it's also significant effort we spend into that.

Biometric Border Control, we see further opportunities. Of course, Switzerland was a very key project for us, which is now coming and will generate revenue in the next years. That was a big achievement for us in the last year, and we see further opportunities in the European and Schengen area.

Secunet medical connect, we launched the first product, which is not the connector, but connecting medical devices according to standards and regulations to achieve a trustworthy communication between the devices and the data-driven services, where we see also opportunities because that's currently not the fact in the medical area that those equipments, especially that are also remotely placed, are really securely connected to the infrastructure. And that's where we see further opportunities for us. And that's where we have the first design wins with a new customer base as well.

And we did a lot of work on the industrial side on having channel partners installed like TechData taking over our distribution channel for us for the hardware. We constantly develop our software platform, which is monitor for OT services. We got the first project. It's not an overnight huge business revenue stream, but we see ourselves very well positioned with our core know-how, and that's what we further invest to have another footprint in the market next to the Public Sector.

Coming to the cloud, again, it's one of the key segments. That's where we see the opportunities and growth opportunities because most of our business, a huge chunk of our business will go into the cloud. You still need workstation, which is a good thing. I think we'll be the first or the only player in the market that offers both cloud but also client solutions for the cloud in one platform, which is I think it's also a unique positioning of secunet versus other players that are either in the cloud or providing workplace technology. But we are the only guys in the market actually offering both. And that's in an approved way also with the, let's say, a stem from the BSI.

So we want to transform our expertise, and that's why we hired SysEleven. We will now have 120 people on board with a long-term cloud infrastructure and software experience, but also with operational experience, which I think it's very key that we can showcase operational experience over 10 years in the cloud area and especially for addressing public sector. I think this is a very key point when we see the first projects upcoming.

We, here, also build ecosystem of partners to achieve a value add, and especially also address market-specific offers, which will be quite specific, especially in the public sector, but that's also a segment we are preparing for. So again, I think we are excellent starting position with the ingredients I just described. And we are quite optimistic and also excited that we hopefully play a significant role also in the cloud infrastructure in the future in Germany.

Coming back to the forecast on key assumptions for '22. We have none, let's say, pandemic-related market effects, so what I said before, we are coming back to normal. But even if you take out the special effects over the last couple of years, we see a very solid growth underneath. Yes, we've reduced EBIT lines, but still, I think, on a very profitable basis, where we can also finance our growth in the future on our own and we are not dependent on external financing measures.

We still have restrictions also on the revenue for this year because of semiconductor supply, so we have shortages. We are shifting. I think we are not losing, but we have to shift revenue also from this year to next year due to supply chain restrictions. It's not necessarily significant, but it will be a very tough Q4, as you can derive from the numbers. So Q4 will be very intense and we are preparing basically to work until the last day of this year to achieve the revenue and also the EBIT target.

It's a very tight schedule, I think probably the tightest schedule ever for fourth quarter, but we are still confident that we can achieve it, assuming also that supply chain works in the current way. But again, we'll see some shifts also for this next year that's already in the assumptions implemented that we shift revenue from this year to '23.

On the overall situation, both from Ukraine and the energy crisis, they are positive and maybe also some negative things. Positives, definitely, there's a higher awareness for cybersecurity on the customer side, especially on the business sector, where they see attacks and the attacks are increasing. That's the good thing, so their willingness basically to spend there. Of course, the focus at the moment for a lot of companies is the energy situation and the cost of the energy. And, of course, that's a little bit the downside effect that cyber is very important, but energy might be even more important from that point of view.

So assuming that energy will be solved sooner or later, cyber will remain, and that's where we also see then a growth potential later on. At the moment, energy is definitely dominating a lot of discussions. But I think we are going back, hopefully, one day that where energy is not the key topic and then cyber will remain as one of the key priorities for the companies.

Positive thing for us overall. Supply of energy and raw materials to our business basically are not an important factor, so we are not very much affected from the energy situation overall on us. But of course, especially our customers in the business sector are affected, and that's what we have to take into consideration.

So final slide on the forecast. That's what you can see here again, taking away, let's say, the special effects in the last 3 years, where we had the e-Health connector launch in 2019 with a special effect in the last 2 years with pandemic-related effects with additional procurement. If you take that away and see, let's say, the solid growth underneath, you can really derive a very solid growth line on revenue, and we hopefully can also extrapolate that in the upcoming years with a good profitability, maybe with some fluctuation in profitability, because this year is definitely, next year will be some years for investment into new portfolio elements. But I think overall a very positive and profitable situation overall for secunet.

And I think within the market, we have a unique positioning, both on the portfolio, on the business model, and our core strength with over 1,000 people working dedicated on IT security. I think that gives us a very good chance for addressing upcoming opportunities in both markets, both in public and the business sector.

And with that statement, I would like to conclude today's presentation, and now we are open to your questions. We're happy to answer them. So thanks again for listening, and I think we are now ready for Q&A. Thank you.

[Operator]

We'll take our first question from the first participant, Mr. Norbert Kalliwoda from Dr. Kalliwoda Research GmbH.

[Norbert Kalliwoda, analyst]

I have 2 questions. The first is a general one. So about products for your sales or your products in different countries, can you increase that partly because of increased energy prices? Or if you intrude to new areas and countries like Middle East, are you starting with lower sales prices? Can you give us a little bit of an insight in that?

And okay. And should I ask the second question -- the second question would be, this e-Health connector. So you had minus 87% profitability or EBIT, so whereas sales was 1/3 roughly lower. Is it because of the fixed costs logically, or can you give us a deeper insight how you can improve that maybe?

[Axel Deininger, executive]

Okay. Thanks again for the questions. Maybe let me take the first one and Thomas can give you some insights into the second question. The first question, if I understood that correctly, on sales prices internationally. So first of all, I think we are not necessarily affected from the energy situation internationally, where we're rather negatively affected on the pandemic situation, because we were not able to travel in the controlled time. So that's coming back, so we now can also execute projects.

And again, we didn't see a huge increase in revenue, but we had a stable slight increase in revenue and that was also due to corona, but less due to energy. And I think on the sales price level, also Middle East, we have stable prices, so we don't give special prices for international partners. We are not on that level. I think we got fair pricing overall also in the Middle East. And of course, they are not affected from the energy situation anyway.

Sales price internationally are on a very good level, decent level. There, it's rather the additional effort, of course, on opening up sales channels, having channel partners there, et cetera, that's the effort. But the pure product sales price, I think, is on a very solid level. And that's what we also don't compromise, I would say from that point. Thomas, you might help on the e-Health connector.

[Thomas Pleines, executive]

Yes. For the e-Health connector, as I said, the first 2 years were very high regarding revenue and EBIT margins because we sell the hardware and we sell the software. Now it's maintenance business. It's fine for us, the maintenance business. You don't see the EBIT margins because we are investing in the second part of the business sector. It's industrial, so there we are pushing a lot of projects to become a player in the OT/IT market for dealer-like products. So that's the investment we do for people, and therefore, the margins are lower than compared to the previous year.

[Operator]

We will now take our next question from Felix Ellmann from Warburg.

[Felix Ellmann, analyst]

With regards to the Bundeswehr and the EUR 100 billion, which we all read in the press, when can we expect 1% of that in your order book?

[Axel Deininger, executive]

Okay. Completely surprised by that question. That sale is EUR 100 million. You can subtract, I think, interest rate, et cetera, et cetera. Now it would be great, of course, to see even 1% out of that. I think it will take time. But if you read through the lines, especially of the famous EUR 100 billion, most of that goes into, I would say, weapon infrastructure systems, I think EUR 20 billion on ammunition, where we also have shortages.

I think it will access a little bit the budget on IT spendings. And we have, I think, good opportunities for next year and for the next 2 years. But very clearly to say, dedicatedly there is not a significant budget that is in our area, I would say, of digitalization. It relaxes a little bit the pressure on budgets within the Bundeswehr that we get a relaxation on projects.

But I think basically the EUR 100 billion are spent into other areas, full stop. There is partly also radio frequency projects and I'm also getting frequently questions, are you there? But we don't do radio frequency. We do IP stacks and IP business-based business, so we don't do a radio business. So yes, overall, we'll see chances, but by far, not in that area of the 1 percentage you mentioned. So that's for...

[Felix Ellmann, analyst]

Well, it's all right. The question was about your impression generally, cost is [indiscernible].

[Axel Deininger, executive]

Yes, yes. No, it would be great. I would take in the 1% easily. But no, we have projects. We don't win everything, of course. We have also competition. But I think the big chunk, of course, goes to other areas. But we have, overall, I think, a very, I think, positive sales opportunity pipeline, I would say, in that area. But that also includes NATO.

[Felix Ellmann, analyst]

And when it comes to timing, when will be the main part, if any, from this EUR 100 billion will come to you? Will this be next year or the year before? Or when do you expect them, if any, when it will come?

[Axel Deininger, executive]

When you look at their planning cycles, they're rather on the long haul. So if it comes to us, we expect rather, let's say, second half next year or it's going into '24. On top, we could ship more if we would have semiconductors. So there, frankly speaking, also we have some downsides on the supply chain. Then I would be able to generate more revenue, but that's where we are limited on some of the supply chain as well there, especially with some products that are going for Bundeswehr and that's what we hopefully can solve. And that, I would assume, takes second half next year and it's going into '24.

[Operator]

[Operator Instructions] We'll take our next question from Sergej Shelesnjak from Lupus alpha Asset Management.

[Sergej Shelesnjak, analyst]

So mine would be regarding the connectors. So as far as I know, in public sources, you can read that there are 83,000 installed right now and that they need to be changed or updated starting end of '23. And can you tell me when these revenues will come and how many of these 83,000 installed base need to have an update? And what are the costs per connector? Is it like EUR 2,500 per connector? Is it a reasonable assumption?

[Axel Deininger, executive]

Thomas, you want, or should I?

[Thomas Pleines, executive]

I can give you some details about this. There's an ongoing discussion about this changing of the connectors. It's more or less a political discussion because we just delivered 3 years ago a piece of hardware with software installed. Now there are some security aspects that the connectors normally need to be renewed.

But there's an ongoing discussion if the money is worth it to renew all the things. So they discussed it on the political level if there are possibilities to lower the security and don't have to change the hardware. And at the moment, we're prepared to renew the connectors. We think that there will be some pieces, but we are not seeing a clear number for the future what will be the outcome of this political discussion, because they all try to get rid of the hardware, they don't have an alternative to use only software.

So we have to do something. And the question is, will they lower the security aspects of the connector and then get rid of changing the connector, or will they stay on the high security level, and so you have to change the connectors, that's a little bit of a problem. Our competition, [indiscernible] Group, is changing some pieces of the connectors. We are not at this stage, because our connectors were built to last longer on the security side.

So we have to wait. We're preparing for both scenarios. The one scenario is changing the connector. The second scenario is to prepare a software solution that's at the moment the situation. And we hopefully get a clear message from the political side, whether the one or the other scenario is in place and then we can react and make our business.

[Sergej Shelesnjak, analyst]

Just as a follow-up, I mean, when you expect this message from the political side and what would be the potential sales for each scenario?

[Thomas Pleines, executive]

So we think that this year we must get a clear answer from the political side. And the scenario is, as I said, one scenario is no connector will be replaced, and the other scenario is all of them will be replaced. We are not sure what scenario will come. At the moment, we are calculating about 50%, because, again, it's not only changing the connector, we have to bring our customers to stay and think of it as a regular connector, and that it's competition with the competitor, [indiscernible], we have to wait.

We, as I said, expect an answer this year, whether scenario R or E will be in place and then we can react. And if we get renewal of the connector, we will not sell again 83,000 pieces. There will be a lower number. And there will be another price because the connector is financed for the doctors and the doctors will only pay once they get the finance sum. So we have to wait what will happen in the future, but hopefully, this year.

[Operator]

We'll now take our next question from Norbert Kalliwoda from Dr. Kalliwoda Research.

[Norbert Kalliwoda, analyst]

You mentioned this Biometric Border Control, this new contract in Swiss. Was this a tough work? When you pitched there, had you had the Swiss alternatives or were there other players taking part in the round? And further on, is it possible to expand on that area, in the French Swiss area, in France or in Italy? So would be happy to have some insight.

[Axel Deininger, executive]

Thank you. So first of all, when you look at the -- I think, our focus area there is the Schengen area in Europe, so we are not necessarily in long-haul areas, I would say. So we focus in Europe. Second point, there's always competition, so there are no tenders upcoming without any competition. So we have to carefully, of course, position ourselves on both technology and price. And I would say most of the projects we won is not because we are the cheapest, but we have to consider the best technology. And that, I think, was the decision point.

So we have now a couple of hundred e-gates out there in Schengen in various areas. We have Germany. We have, for example, Czech Republic with Austria. We have Switzerland, on the upward side. We have Iceland. So I think we have a good footprint. The next phase will be that we also will address that market with kiosk systems, which means with automated visa data entry that's now going to install in Schengen area as well. So next to the e-gate system.

So we have portfolio enhancements where we, of course, have a good position in the airports now already. There are markets probably we're not necessarily targeting, which would be France, because there's strong competition. So maybe France is not the sweet spot, but Middle Europe and also Eastern European countries are definitely our target sweet spot. And of course, Switzerland gives us a nice reference, but mid references before.

Again, we have, I think, now 300, 350 e-gates out there in Europe. And there's still, I think, some growth opportunity in both new projects, renewal cycles, but also now kiosk systems for visa data entry or for automating the visa data. But there will be always competition. So we have never seen a tender in Europe without competition. There is strong competition, both from France, but also from the company from Portugal. So we face the competition. But I think so far, we have been quite successful. We didn't win all the projects, of course, but we won those key projects we thought we have to win and those we also won.

[Operator]

[Operator Instructions] It appears there's no further questions at this time. I'd like to turn the conference back to you, Mr. Axel Deininger, for any additional or closing remarks.

[Axel Deininger, executive]

Thank you. So again, thanks a lot for your questions. I hope that we were able to answer them. When you see, again, on the overall situation, we have -- of course, a very intense time, I think, for all of us, not only because of the energy, because of the Ukraine situation, of budgets also from the German government on cybersecurity, on building infrastructure in the cloud. So we have a lot of question marks for the upcoming years.

But I promise we do the utmost at secunet to address those opportunities. And I think we are well-positioned in this cyber area with the most, I think, competitive and most complete portfolio in that area. And we are still and will remain the single largest IT security company in Germany. And that, I think, gives us a very good head start.

But we don't take the projects for granted, so we will fight for all the projects that are now upcoming. But of course, there will be restrictions because it's uncertain situation, both in overall economic circumstances, especially in the supply chain. We expect a better supply chain next year, but no one knows exactly, frankly speaking. So hopefully, the semiconductor supply will relax a little bit in next year, but that's still not foreseeable at the moment. So we see some constraints.

But I think so far, we managed that quite well. Also, compared to other companies, we had a very good and stable supply situation that was also very much appreciated from our customer base. And we are looking quite optimistically into the future and addressing the opportunities that are upcoming both from the public, but also from the business sector.

We have full visibility on the connector exchange and on budget spending from the [indiscernible], but I think no one has that, but I think where we have very good customer relationship and insights. And I think we will react accordingly when it's the right time, I would say. That's our key strength as well, not only portfolio, but also our customer intimacy. And that's what also we'll play in the upcoming years.

Again, thanks a lot for your contribution, for your questions and for listening, and see you next year and take care until then. Thank you very much. Goodbye.