Earnings Call: Q3 2022

Nov 8, 2022

Earnings release

Welcome to Secunard Security Networks AG Group Quarterly Statement as at 30th September 2022 Conference Call. Name is Priscilla, and I'll be your coordinator for today's event. Please note this call is being recorded and your lines will be on listen only. However, you will have the opportunity to ask questions at the end during the Q and A session. I will now hand you over to your host, Mr. Axel Denninger, to begin today's conference. Thank you. Thank you, and welcome everybody to today's call on the numbers from September this year. Let me start with a couple of key takeaways and then the CEO, Thomas Bleyniss, will take over to guide you through some financial Key takeaways. As we expected, this year will be a tougher year than the previous years. I think we still show a stable revenue of €213,000,000 with a solid EBIT line of Close to €24,000,000 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. So what you see what we've always seen, there were 2 effects, corona based on 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 4 with a revenue of around $320,000,000 and we are shooting for an EBIT towards the end of the year of $50,000,000 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. So hello everybody from my side. We will start with the group level Numbers. So we reached €213,000,000 in Revenues around about $24,000,000 in EBIT. As Akzo said, it's compared to the last year related to Two special effects. 1 is the public sector, it's pandemic related additional sales and 1 is the business sector, the higher product sales from the 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 The 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 Zena architecture and the special appliances that make Yes, very well going business in last year. That was not again in this It happened. So therefore, we have €180,000,000 in revenue and €23,000,000 in EBIT. And as In the history, the public sector remains the group major's revenue contributor. On-site to the business sector, no, thank you. Business sector around 30 €30,000,000 revenues €1,000,000 EBIT. Of course, as I mentioned, there was a Deep impact from the EAS business because the business is going down. We have 2 brilliant years in the past by Delivering the Health Connector and that is something that will not happen in this way the next years. So We have to see that there's a reducing of this business in our business sector. The contribution of this part of SecoNet is 60% compared to 18% since 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 this 11,000,000 round about $50,000,000 This was a big impact on On cash side, and of course, we have a special dividend payment, euros 35,000,000 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 work For example, therefore, our cash position is lower than The year 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 Aksel. He will give some Yes, what we can expect in the future. Thank you very much. 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 full utilized development capacity. So we have also new stuff in the pipeline, and we also Additional growth opportunities and sales opportunities upcoming in the Q4 of this year. So I think overall a very stable position we'll Focus for us is still what we always said, sustainable profitable growth with a focus on the Effective IT Security Solutions will 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 Xena 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 the on further growth. On the public sector, we still, of course, we are working very hard and fully loaded with further developing of our SINA infrastructure and the core technologies. With the acquisition of Sys11, 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 and D side that we can also address projects when they're finally upcoming In the next year or in 2024. 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 further revenue growth, especially in the cloud area. Business sector, Again, next to the eHealth Connector, we also developed further solutions for the eHealth market, which is always difficult because it's regulated. But I think also here over time we'll see or 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 projects we have, we are fully loaded here On the business sector side with our consulting team, that's where we are really good. But here also we In future portfolio expansion technologies to see and to support further growth in the upcoming years. International, yes, the Share didn't change a lot, but you see here also it 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 U. S. And Middle East. And within NATO, we see also here future opportunities. It will take time, but you see here again, even without Even within corona, we're 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 and 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 also existing business, but also to address new business. But especially, I think, for us, Key acquisition was CIS11 because we expect the first opportunities upcoming now next to the For Ministry where we have already installed the cloud infrastructure, we'll see also in the public space 1st project upcoming next year or in 2024, and that's what we're currently preparing our cloud That was a very key acquisition to expand our portfolio towards the cloud. We still have Further developments on our core product, which is SENA 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 So for the growth potential. But that's ongoing work we always do. But here, it's also significant effort we Biometric border control, we see further opportunities. Of course, Switzerland was a very key project for us, which is now coming and will revenue we will generate revenue in the next years. That was a big achievement for us in the last And we see further opportunities in the European and Schengen area. Secure 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, we see also opportunities because that's encouraging of the fact in the MedLink area that those Equipment, especially that are also remotely placed, are really securely connected to the infrastructure. And that's where we see further opportunities for us, and 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 Like Tech Data, they're taking over distribution channel for us for the hardware. We constantly develop our software platform, which 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 for us the key segments. That's where we See the opportunities and growth opportunities because most of our business or a huge chunk of our business will go into the cloud. You still need workstation, which is the good thing. I think we'll be the 1st 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 SecoNet 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 We also with a, let's say, a stamp from the BSI. So we want to transform our expertise, that's why we hired this 11. We now have 120 people on board with a long term Butter and software experience, but also with operational experience, which I think is very key that we can showcase operational experience over 10 years in the cloud And especially for addressing public sector, I think this is a very key point when we see the first We here also built 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 what we are preparing for. So again, I think we're in an 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 2022. We have non, Let's say pandemic related market effects. So we are what I said before, we are coming back to normal. But even if you take out Special effects over the last couple of years, we see a very solid growth underneath. Yes, with reduced EBIT lines, but still I think on a very profitable basis We still have restrictions also on the revenue for this year because of the semiconductor supply. So we have shortages. We are Shifting, I think we're 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 To 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 Q4, 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 20 On the overall situation on the both from Ukraine and the energy crisis, they are positive and Maybe also some negative things, positives. Definitely, there's a high awareness for cybersecurity also On the customer side, also on the especially on the business sector where they see attacks and the attacks are increasing, that's the good thing. So they are their willingness basically to spend there. Of course, the focus at the moment is for a lot of companies is the energy situation and the cost of the energy. And that's 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 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 company. 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, our especially our customers in the business sector are affected, 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 the, Let's say the special effects in the last 3 years where we had the Ehealth 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 the, 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 of profitability because this year is definitely next year will be some years for investment new portfolio elements, but I think a very overall very positive and profitable situation overall for SecoNet. 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 And with that statement, I would like to conclude today's presentations. And now we are open up open for your Questions, we're happy to answer them. So thanks again for listening, and we are now ready for Q and A. Thank you. Thank you, Mr. We'll take our first question from the first participant, Mr. Norbert Doctor. Kalliwoda from Doctor. Kalliwoda Research GmbH. Please go ahead. Your line is open. Hello. Thank you so much for your presentation, Mr. Deininger and Mr. Breeness. I have two questions. The first is a general one. So about products for your sales for 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 an insight in that? And okay. And should I ask the second question? Or The second question would be this EHills connector, so you had minus 87% profitability or EBIT. So whereas sales was 1 third roughly lower. Is it because of the fixed Costs logically or can you give us a deeper insight, how you can improve that maybe? Thank you. Okay. Maybe let me take thanks again for the questions. Maybe let me take the first one and Thomas can give you some insights into the second The first question on 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, we were rather negatively affected on the pandemic situation because we're not able to travel in the control time. So that's coming back. So we now can also Projects. And again, we had we didn't see a huge increase in revenue, but we had a stable slight increase in revenue and that was also Through 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're not dumping on that level. I think we got fair pricing overall also in the Middle East, then of course, they are not affected on the energy situation anyway. So I think 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 The channel partners there, etcetera, 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. Okay. From that point. Thomas, you might Thank you. The EHALP connector. Yes. For the EAS Connector, as I said, there was the first two years were very high regarding Revenue and EBIT margins because we sell the hardware and we sell the software. Now it's a maintenance business. It's fine for us, the maintenance business. You don't see the EBIT margins because of 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 like Athena like products. So that's the investment we do For people, therefore, the margins are lower than compared to the previous year. Okay. Thank you so much. Thank you. We will now take our next question from Felix Allman from Warburg. Please go ahead sir. Your line is Mr. Felix Allman, your line is open. Hello. I was muted unfortunately. With regards to the Bundeswehr and the €100,000,000,000 which we all read in the press, when can we expect 1% of that in your order book. Okay. I completely surprised by that question. That famous €100,000,000 you can subtract I think interest rate, etcetera, etcetera. No, we 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 €100,000,000 most of that goes into, I would say, weapon infrastructure systems, €20,000,000,000 on ammunition, where we also have shortages. I think it relaxes a little bit the budget on IT spendings. And we have, I think good opportunities for the for next year and then for the next 2 years. But dedicate me very clearly to say, dedicated there is Not a significant budget that it's not that it's in our area, I would say, of particularization. It relaxes a little bit the pressure on budgets within the Bundeswehr that we get a relaxation on projects. But I think basically the €100,000,000,000 are spent into other areas. There's partly also radio frequency projects that I'm also getting frequently questions, are you there? But we don't do radio frequency. We do IP stacks and IP Base business, so we don't do 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 not Well, the question was it's all right. The question was about your impression generally. Of course, this 1% worth of choke. Yes, yes. No, it would be great. I would take it the 1% easily. But no, we have projects. We don't win everything, of course. We also have 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. And when it comes to timing, when will be the main part, if Any from this €100,000,000,000 will come to you. Will this be next year or next year before? Or when do you expect them, If any, when it will come? When you look at their planning cycles, they're rather on the long haul. So we expect that rather if it comes to us, we expect rather, let's say, second half next year or it's going into 2024. On top, we would be able to or we could ship more if we could have semiconductors. So there, frankly speaking, also we have some downsides on the supply chain. So we then I would be able to generate more revenue, but that's where we are limited on some of the supply chain Well, there. Especially with some products that are going for Bundeswehr. And that's what we hopefully can solve. And that's, I would assume, takes 2nd half next year and it's going into 2024. Okay. Thank you very much. Thank you. All right. We'll take our next Question from Sergey Shailen from Lupus Alpha Asset Management. Please go ahead sir. Your line is open. Hi, thanks a lot for taking the question. 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 We changed until or updated starting end of 2023. And can you tell me When these revenues will come and how many of this 83,000 installed base need to have an update and what are the Costs per connector is like €2,500 per connector. Is it a reasonable assumption? Thanks. Thomas, you want or should I Thomas, 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. And now there are some Security aspects that for the collectors normally need to be renewed, but there's an ongoing discussion if the money is worth it. 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 At the moment, we 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 they have to do something. The question is, will they lower the security aspects on the connector and then get rid Changing the connector or will they stay on the high security level and so you have to change the connector. So it's a little bit of a problem. Our competition, Compu Group, is changing some pieces of the connectors. We are not at this stage because our connectors We're 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 Nairo is in place and then we can react and make our business. Thanks. Just as a follow-up, I mean, when you expect this message from the political side? And what would be the potential sale for each scenario? So we think that this year must be Yes, you have a clear answer for the political side. And the scenario is, as I said, one scenario is no connector will be replaced 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 at Zekonet. It's a Zekonet Connector and that's competition with the competitor, Kopi Group and Rice. So we have to wait. We, as I said, We can answer this year whether scenario R or P will be in place and then we can react. If we Yet a renewal of the connector, we will not sell again 83,000 pieces. There will be a Lower number. There may be it will be another price because the connector is financed for the The doctors will only pay once they get as a finance sum. So we have to wait what will happen in the future, hopefully this We'll now take our next question from Norbert Doctor. Kalliwoda from Doctor. With Kalawuta Research Center. Please go ahead. Your line is open. Hello. Yes, hello. Thank you. Thank you for taking my question. You mentioned this biometric border control, this new contract in Swiss. Is this was this a tough work? When you pitched there, had you some Had the Swiss alternatives or have there other Players taking part in the round? And further on, is it possible to expand then that area in the French, Swiss And in France or in Italy, so would be happy to have some insight. Okay. Yes, thank you. So first of all, When you look at the I think that's 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. 2nd point, there's always competition. So there are no tenders upcoming without any 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's I think was the decision point. So we have now a couple of 100 Egids out there in Schengen in various areas. We have Germany. We have, for example, Czech Republic. We have Switzerland on the airport side. We have Iceland. So I think you have a good footprint. The next phase will be that we also We'll 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 is 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 we had referenced this before. Again, we have, I think now 300, 250 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's strong competition both from France but also from the company from Portugal. So we faced the competition, but I think so far we have quite been we have been quite successful. We didn't win all the projects, of course, but We won those key projects we sought. We have to win in those we also won. Thank you. Thank you, Soren. Thank you. It appears there is no further questions at this time. I'd like to turn the conference back to you, Mr. Axel Dininger for any additional or closing remarks. Thank you. 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 very of course, a very intense time for I think for all of us, not because of 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 SecoNet to address those opportunities. And I think we are well positioned in the 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. Do we have full visibility on The connector exchange and on budget spending from the Boulis, no, but I think no one has that. But I think 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 we will that's what we also will play in the upcoming