Earnings Call: Q3 2021

Oct 26, 2021

Welcome to the EMEA Interim Report, January to September 2021. For the first part of this call, all participants will be in a listen only mode and afterwards, there will be a question and answer session. Today, I'm pleased to present CEO, Jan Heglund and CFO, Ole Bergmann. Speakers, please begin. Thank you very much, operator. This is Jan Heglund, CEO of EMEA, and we're here to present to you the interim report of January to September 2021. We will be summarizing the key events of the quarter, going a bit more into financial details and then wrap up with a way forward and outlook for the future. On Page 3, we summarize our financial results. And behind this is Energia's significantly stronger position in 5 gs and the cybersecurity with net sales of SEK257 1,000,000 in the quarter, which constitutes a 26% increase year over year. We have since last year done 2 successful acquisitions, 1 of Wi Fi Specialist, Aptilo and the other of security specialist company Adaptive Mobile Security closed in on 17th July this year. They both contributed in a positive way to the quarter. We came in with an operating margin of 23.6%, thanks to a strong performance of both of the acquisitions and the previous business, good mix of software business versus other parts and continued cost control. This corresponds to an operating profit of SEK61 1,000,000 for the quarter. Net debt to EBITDA It was 1.76%, an increase relative to last year, following the financing of acquisitions during the recent four quarters. Earnings per share came in at SEK 2.33 Swedish krones, operating cash flow was SEK28 1,000,000 lower than last year, following a higher ratio of large projects in the quarter. And we continue to invest significantly into innovation and R and D with continued around a quarter of our earnings of our revenues going back into R and D Investments, both Expensed and capitalized. For the period, we have net sales of SEK 696 SEK1 1,000,000 and operating margin of 24 percent, earnings per share of SEK6.76 and an operating cash Flow of SEK 191,000,000. Let me summarize a bit of the key events for the quarter. They're summarized on Page 4, where the acquisition of Adaptive Mobile Security was a significant event and a significant step for EMEA, we've also closed important deals. Traffic classification deal for software defined wide area networks was US3.5 million dollars significant contract for secure authentication with a Central European, a Tier 1 operator. And we also announced some product innovation, both on the core network side for improved resource and energy efficiency as well as on the radio this network side for improved network capacity. Let me on the following slide give a little bit more details on these news. Page 5, the acquisition of Adaptive Mobile Security is a significant step for EMEA. As I think we all know, threats on cybersecurity are increasing. And thus a significant target also for these kinds of threats. Also telecom infrastructure Is vulnerable to specific threats, for example, around messaging and signaling. And that's exactly where Adaptive Mobile Security has a leading position on the market, helping operators, Governments as well as Enterprises in securing of both messaging and signaling. It brings a strong portfolio and a customer base, especially with Tier 1 customers with focus on telecom security to EMEA. Adaptive Mobile will have Sales of approximately €17,000,000 for the 1st full year of 2021. And the 3rd quarter then was a strong quarter with Sales of SEK 47,300,000. This contributes to the largest product group in EMEA that we call Network Solutions. In terms of profitability, we have previously said that Adaptive Mobile Security will be EPS accretive from the Q4, and we maintain that forecast. On the next page, summarize a contract that we took with An American North American vendor of cloud networking solutions for large data center and campus environments. Energia has a leading position in traffic classification based on deep package inspection technology, And this is a significant contract for us. It's worth US3.5 million dollars over 6 years. And the revenue model here is entirely based on recurring revenue. So it gives us revenue, Stable revenue for a number of years to come. And we're happy to see then that our software, being the leading software in the industry, will be embedded in intelligent SD WAN solutions for providing granular traffic information for both WAN optimization, Quality of service, firewalling and reporting. And firewalling again shows that cybersecurity is again then an area where we contribute significantly with our technology leadership and our software portfolio. On Page 7, also summary of another key contract in the quarter. We closed a contract over 5 years With the Central European Tier 1 mobile operator. Our software will now be part of an authentication Solution, again authentication, you can see, is part of security in mobile networks, making sure that the right users Are allowed into the network and are it's an area where we have technology leadership. And This is an existing customer to us, but it signifies a new business with this customer. So we're really happy about that. And again, it's a proof point for our leadership in the cloud native software for 4 gs, 5 gs and Wi Fi networks. And then finally, among the news for the quarter, let's just touch on some of the product innovation that we continually do. We have areas like data management and traffic management where we have leading positions and where we continue to invest and break new ground. One of the announcements this quarter is how our data management solutions Help customers to not only save data in a secure way, but in fact also save resources because Through an intelligent way of handling data and storing data, we have, through collaborations with operators, shown how we can actually reduce The hardware utilization as well as energy utilization by up to 50% compared with competitors' solution, a significant part, especially in an area where data center utilization continues to grow in the world. Similarly, on the radio access network side, as everyone knows, spectrum and radio resources is a limited resource. And thanks to our traffic management solutions, we've been able in operator studies to show how we can increase just through software the capacity in these radio networks by up to 15%. That capacity can be used to increase the quality of service for end users and to reduce spend, for example, on new expensive sites or an equipment. Again, we're really happy about this innovation and the confidence that our customers give us in this area. Now with that short summary of the key news in the quarter, I'll leave it over to Ulla Burmark, who is new CFO since October 1 for EMEA. Welcome, Ulla, and please take us through some details of the financials. Thank you, Jan, and hello, audience. So we're moving into Page 10 And look at the net sales for the quarter amounted to NOK 257,000,000 to be compared to NOK206 1,000,000 last year. This is a growth of 24% and adjusted for currency impact, the growth is 26%. The growth is mainly driven by the 2 acquisitions, Aptilo that was acquired and incorporated in EMEA as from 4th Water 2020 and the Adaptive Mobile Security that was Next slide, please. This slide very much shows the transition of EMEA and the focus on network solutions. The total revenue, as I said, has grown with approximately SEK 50,000,000 since last year. And all that growth is shown in the Network Solutions. Network Solutions sales for the quarter amounted to SEK 198,000,000 Compared to SEK137,000,000 last year, which is an increase of SEK 60,000,000. The operating system solution had a net sales in the quarter of 30 euros 2,000,000 compared to €38,000,000 last year. But also worth noting, it's a decrease of 15% versus the Same quarter last year, but it's fairly stable versus the Q2 this year. And finally, we have the software development services So very much in line in what we saw in the Q2 this year. All in all, Network Solutions generated a growth of 46% and today accounts for approximately 80% of the total sales of the group. Next slide, please. Profitability in EMEA has Grown despite the sort of relatively modest growth on top line. What we see here is that we have been very good in optimizing our cost structure and maintaining a high EBIT margin. The EBIT margin for the quarter, excluding nonrecurring items, It's 23.6 percent or 60,500,000 Compared to SEK 47,000,000 last Q3 last year. I think we can move to next one. So looking at our financial position, it's a very cash flow generative company in EMEA. And the cash flow before changes in working capital amounted to SEK 6,000,000 in the quarter compared to SEK 68,000,000 same quarter last year. And cash flow from operations amounted to SEK 28,000,000 compared to SEK 82,000,000 same quarter last year. And as mentioned by Jan in the introduction, this is a temporary effect of some larger projects that are in delivery. But if we look at the cash flow for the group for up until September for the year of SEK 191,000,000 and compare that to the EBIT of SEK 141,000,000, we see that the cash The cash ratio versus EBIT is above 1, well above 1, mieder. So the financing structure, it has changed a bit since last quarter, All driven by the acquisition of Adaptive Mobile Security, which was mainly Finance through external loans. And the net debt as per end of September amounted to SEK614,000,000, Spread then by SEK790,000,000 in external debt and SEK176,000,000 in cash equivalent. So if we look at the financial KPIs, the equity ratio is about 57%, slightly lower than last year, but that's, of course, driven by the fact that our financial position has allowed us to increase external debt for acquisitions. And the net debt versus EBITDA on reported EBITDA is SEK1.76 per end of September. So I must say the financial position makes us well positioned to further invest in our portfolio and in organic growth and it will give us some room for Potential non organic opportunities moving forward. Thank you. Very good. Thank you, Ulla. So let me wrap up then on Slide 15. Also summarizing that EMEA continues on our path as a specialist software specialist with focus on 5 gs and cybersecurity. With the acquisition of Adaptive Mobile Security, we have significantly strengthened our position as a specialist in cybersecurity for telecoms. And as this slide shows, we have several assets, in fact, that play into this position. As mentioned before, mobile signaling security, About messaging security, we already have a leading position in secure authentication, which is important also in the world of 5 gs and net of things, we have a leading position in securing data management, in particular, the secure network data layer, which is we have leading software for embedded deep packet inspection, which by many customers is used for cybersecurity applications, both in telecoms and in enterprise, Traffic management and content filtering is also part of securing traffic both to individuals and to enterprises. And then there will be new threats emerging from 5 gs concepts like network Slicing and Internet of Things will open up for new threat vectors towards telecommunications infrastructure. And that's why we are proud to be serving a broad customer base here and we will continue also to use our expertise to serve customers and to innovate. Looking forward, the growing markets of 5 gs, Cybersecurity, virtualization and IoT make us confident that we're playing in an interesting area and that to our position as a software specialist gives us the opportunity to challenge established players and to increase our market share. We have the ambition to significantly grow revenues organically and through acquisitions during coming years. And in particular, as Ulla mentioned, also network solutions is our focus area. We believe we can do this like we have proven during the recent years by maintaining an operating margin above 20%, And we have set a goal to surpass an annual turnover of SEK1.5 billion by latest and of full year 2023. In the short term, we do see a return to a more normal business situation following the COVID pandemic. Having said that, there are, as everyone knows, Still restrictions that remain in significant parts of the world. And we do anticipate that this will cause some issues in terms of project delays and barriers to new sales, which is what we have seen during the last 18 months. Having said that, we retain our outlook to increase revenues compared to previous years and to achieve an operating margin above 20%. With that, I thank you for listening and I'll leave it back to the operator should there be any Q and A. Thank Our first question comes from the line of Simeon Granat from ABG. Please go ahead. Your line is open. Thank you, operator. Good morning, gents. Initially, could you comment a bit on how sales efforts and customer dialogues are developing in different regions given the different Paterson, in terms of vaccination, I know that you're a global company, but any color is helpful on the changing customer sentiment post the summer. Thank you, Simon. Well, I think your business continues through all regions And have continued also during pandemic. And I think both EMEA as a software company as well as our customer have quickly changed To more remote working, using digital tools, etcetera. So I think that goes without saying and that will also be part of the future. Having said that, the personal meeting and the possibility to especially as a challenger to meet with key people, individuals It's an important part of our business, and we see that now coming back, especially in Europe, North America still More challenging also Asia, more challenging for personal meetings. Another key measure is also trade shows and trade fairs, Where there have been some activity now during the recent months, and we expect more of that to come. As I said, some of that in parts of the world, especially Europe, some also in North America, more limited In Asia. So this will be a step by step process where personal meetings will hopefully then increase the dynamic and increase also the possibility For positioning ourselves not with established relations, but also new customers going forward. Thank you. And I calculate on EBIT margin for Adaptemobile about 20% here in this quarter. Is this an Extraordinary strong quarter for the company or should we expect relatively similar margins going forward? I remember that you mentioned that the company should see a margin in line with the group for 2022, but you have not made any comments for 2021? I mean, we're happy about the 1st quarter of the Dusty Mobile Security is off to a good start. And as you mentioned, then the corresponding margin in the quarter was around 20%. What we've said was that we, in general then, as with also previous acquisitions, expect margin In the beginning, slightly lower than EMEA, but that we will, through synergies on the cost side and obviously on the sales side, Work to near any as margin ambition. And so far, we have said that we expect that towards the end of 2022 For Adaptive Mobile Security. So at this time, I think we'll leave it at that, but we're happy with the first Strong quarter. Thank you. And as a follow-up question on that, did you make any significant Again, underlying cost change in the quarter here? Or did you see OpEx increase as societies are even starting to open up here? I mean, we did some restructuring during last year as was announced, and we benefit from some of those restructuring inefficiencies That we did during 2020. And we so we're happy about that. That was the right thing to do. Some of the lower OpEx is, as you point out, also due to lower sales and marketing costs. I mean, trade shows, for example, being canceled. We expect that to come back. We want it to come back, and that will bring some increase in sales and marketing costs, which is completely normal. So I think those are some of the effects, some planned and some well, some due to outside circumstances. And as a final question for me, as of now, 1 year after the acquisition of Tilo, I was wondering if you're starting to see any synergies with the group starting to kick in. And here, I primarily refer to sales synergies. No, thank you. It's we have definitely worked On synergies with the Aptilo Group, the customer base for Aptilo is to a large extent similar to what the rest of EMEA has, Including large operators, Tier 1 operators. So then there are long sales cycles in telecommunications, typically 12 to 18 months. But we are definitely using both contacts and competence to find sales synergies on both sides. Thank you so much. Thank you. Our next question comes from the line of Frank Moore from DNB. Please go ahead. Your line is open. Yes, good morning. Do you hear me? Yes. Good morning, Frank. Hi, great stuff. Okay. So Just diving into one item which was mentioned previously, which Which was the working capital movement, where the CFO mentioned that there were some Large projects that are in delivery causing that. What revenue timing implications Would those deliveries have? Are we talking about Q4 impact here? Do you expect And a delivery that would impact the top line short term? So that's my first question. And the second question, if I may, is more related to these product innovations that you've been talking about, Especially the RAM optimization and the green 5 gs core Innovations. And if you could give some color on obviously to what extent these are more kind of Public relations kind of rehashes or small tweaks and rebrandings and stuff or actually more significant breakthroughs in terms of how customers actually respond to these innovations. Thank you. Okay. Thank you, Frank. Well, I can quickly touch first on your question on working capital. I mean, the operating cash flow, as you know or anyone knows that follows in the year that goes, it varies between quarters And it varies with different things. We have a larger we have a few larger projects going on. And due to the Revenue and payment structure of those projects, we had a variation in this relative to last year. But over time, We see that this will even out with expected profits according to plan. So we see this more as a quarterly variation. In general, We can say that some of these large projects that we have, for example, on 5 gs are making good progress, and we have passed significant milestones during the quarter, as I also point out in the CEO statement. And that's we're really happy about that progress. And that also touches on some of the product innovation that you asked for. No, I think you can say that some of our product innovation, for example, in data management, Quite groundbreaking. We enable them through our software to open up interfaces, To open up, for example, storage of data between applications from different vendors towards our back end, which has never been done before. And in that mechanism, and that's what we point out here, not only then do we open up interfaces, which create the freedom of choice for customers, But in fact, the solution as such is also more resource effective because we don't have to store data many times. We don't have to store data in locations where it's not needed. We can have mechanisms for securing data That are more flexible than competition. And all of that, in fact, adds up to higher resource efficiency and Energy efficiency. So we really wanted to point out that aspect of our innovation. It's a bit the same with the traffic management. There you can see that We've been working on that many years. So there is more continuous innovation where the add on in this Recent product release, it's more that we can do this on a per user basis. So there I think you can see it more as gradual and continuous product innovation. Great. Thank you. Thank you. And our next question comes from the line of Jesper van Gogh from Redeye. Please go ahead. Your line is open. Hello, gents. From both today's report and judging by The recent orders, it seems that you're entering a phase of the 5 gs rollout where you will take a more active role. Could you elaborate on where you see customers at in regards to your 5 gs related products portfolio? Thank you, Jesper. Yeah, I mean EMEA has focused on 5 gs And cybersecurity and in particular then, we have a portfolio for 5 gs core, which is part of what sometime called a standalone 5 gs deployment. And as a smaller challenger, we target a market of best of breed, And we believe that, that market will continue to expand as customers then open up for more freedom of choice going forward. Having said that, it's also noteworthy that the 5 gs market has been delayed During the pandemic, operators have slowed down some of their 5 gs plans. Some of 5 gs standardization has in fact Been delayed, also noteworthy. So I mean it's a mix of those things, but we believe that The direction for the future is pretty clear. The direction is based on software. It's based on cloud deployments. It's based on 5 gs and in particular then the new 5 gs standards. So this is a step by step approach Bayon Ea, where we're happy really happy about the reference contracts we took last year. We're happy about the continued contracts we take Here, this year also with significant Tier 1 operators, and we will continue this effort. These are long sales cycles and also long industry cycles Where 5 gs step by step will be deployed across the world during several years to come. Good. And then a question for Ola. The gross margin was slightly lower during the quarter due to Higher D and A. Could you just elaborate on what made D and A increase and how sustainable that is? There are 2 things that make the E and A increasing in the quarter. One of them is, of course, related to the acquisition of Adaptive Mobile Security, Where the preliminary PPA is in the quarter report, but part of that comes with some amortizations. And in addition, as has been stressed during this call, we are heavily investing in our Future products related to 5 gs and cybersecurity. And currently, our Sort of CapEx on R and D spending or the CapEx part of our R and D spending is approximately 2x the depreciation, Which gives us a higher depreciation quarter over quarter. All right. Good. And then regarding Adaptive Mobile Security, how much of the SEK 47,000,000 sales was Consolidated into Q3 numbers. You can assume that the full number was consolidated Into the Q3 numbers. Thank you. And as we have no more questions registered, I hand back to our speakers. Well, thank you very much for listening. We continue on our path on as a software specialist, 5 gs and cybersecurity are Certainly exciting areas and there is definitely more for us to do. We continue our focus with a combination of organic investments and inorganic opportunities. And hopefully, we've been able to prove through successful development and innovation as well as successful acquisitions that we know how to do this. So we're confident to continue to execute on our strategy. With that, I thank everyone for listening. This now concludes our conference. Thank you all for attending, and you may now disconnect your lines.