Welcome to Enea Q4 report for 2022. For the first part of the conference call, the participants will be in listen-only mode. During the questions and answers session, participants are able to ask questions by dialing star five on their telephone keypad. Now I will hand the conference over to CEO Jan Häglund. Please go ahead.
Thank you very much. This is Jan Häglund, CEO of Enea, and I'm joined here in Stockholm, Sweden today by Ola Burmark, our CFO.
Good morning.
We're here to present the Q4 2022 results of the company. We will be going through the key events of the quarter. We will be going through details in the financial results. Ola will do that. I will round up at the end with a update on our strategy and an outlook for both the coming year as well as the longer term. Looking at the summary of our Q4 as well as the full-year results, we ended strong. We ended with a strong quarter of SEK 271 million in net sales and an operating margin above 21%, 21.4%, in fact, excluding non-recurring items. That is a significant improvement over previous quarters 2022. Our net debt amounted to SEK 320 million at the end of the year.
Earnings per share in the quarter were 1.82 SEK. The operating cash flow was negative SEK 2 million, explained by late invoicing in the quarter, so that did not contribute to cash flow in the quarter, and also by the fact that we did not pre-invoice some support contracts, which we did the year before. Those support contracts will be invoiced now during the first quarter of 2023. We continue to invest in R&D. The ratio of R&D over net sales in the quarter was 22.4%. With a higher net sales that's lower than the year average, but the amount is the same. We continue to invest for the future because we believe in the growth opportunity. Looking at the full- year, net sales came in at SEK 928 million.
An average operating margin of 16% affected then by weaker first and partially second quarters in the year. Net debt, as said, SEK 320. Earnings per share came in at a record 10.43 for the full-year, positively influenced by the divestment we did early in the year of our services business. Operating cash flow was SEK 167 million, and the ratio of R&D on the full-year to net sales was 29%. Looking at the key developments of the quarters, we're really happy that we had some significant wins. Some significant wins that really prove that we're on the right track with our strategy and that we can beat competition in almost any area that we operate in.
We did win a significant Wi-Fi deal in North America, as well as a multi-country security contract in Europe. Both those are also examples of cross-selling, where we use an established position with strong and large customers to sell a broader portfolio to a large extent from the acquisitions that we've done during recent years. We did achieve an increase in net sales and operating profit compared to previous quarters in the year. What's particularly pleasing is that we now achieved a growth in our network solutions. Network solutions, which is the vast majority of revenues for the company, 87%, grew by 3% organically or 12% in constant or in fluctuating currency. Operating systems is historically the foundation of the company, now a smaller part of our revenue.
It continues to decline. It did decline as 20% in constant currencies. What is positive here is that with one of our key customers, we did prolong the support agreement, not the one-year agreement that we've done previously, but in fact a three-year agreement, which provides the coming three years predictable revenues that allows us to plan also our delivery, which we're very pleased with. We do continue to see high attention on cybersecurity. I'll be coming back to that. It is enhanced by the geopolitical environment. The fact that we did an acquisition in 2021 in this area is something that we now see the payoff of. We maintain our growth ambition. We do continue to invest in sales and go-to-market capabilities to capture new business.
In fact, we have recently hired a number of senior sales and marketing people that will help us to broaden the reach with large customers and to enhance our presence and brand on the market. Cybersecurity is of course a very hot area. Cybersecurity for telecommunications has been discussed a lot. Recently, Swedish Security Service, SÄPO, warned that there are threats, there are threats also towards the telecom segment, and that adds to other type of threats in cybersecurity. For example, threats from frauds against companies and individuals. Those threats can come from various places. One of those channels is, in fact, text messages, and I think all of us recognize that we sometimes get text messages that are unwanted and that potentially would be damaging to us as individuals.
We're happy to be blocking a lot of that, the technology exists to prevent those kind of fraud attempts. Only in the U.S., we block around 50 million fraud or spammed messages every day. With this attention on cybersecurity, it's no surprise that the Mobile World Congress in Barcelona, which takes place later this month, will have more focus on cybersecurity. There will be, in fact, a first security conference that will address defense and security groups from multiple countries. In this perspective, we're really happy that we did close a significant deal for mobile network security with an European tier one telecom operator. The total order value was EUR 2.2 million.
We did this thanks to a unique portfolio of products and expertise, to a large extent, coming from the acquisition we did in 2021 of Irish company, Adaptive Mobile Security. This allows us then to help customers to protect against intrusion and sabotage attempts. This agreement is with an existing customer also. Happy about that we can use an existing relation and existing contracts to enhance the business now into cybersecurity. This did have a positive effect also on revenues in the fourth quarter by EUR 1 million being recognized. The rest will be recognized during a three-year period. Another topic that is very much talked about in the industry is the growth of capacity, the need for capacity, the need for coverage, and the role that Wi-Fi will play as a complement to 5G.
I say that it's talked about, but perhaps not enough talked about because many vendors do not have a strong Wi-Fi offering. Enea has a unique position in that we do both. We both have a 5G portfolio, and we are a leader in public Wi-Fi coverage. I think most analysts agree that Wi-Fi traffic will continue to grow, and the role of Wi-Fi will continue to be very important as a complement to 5G, in particular for indoor coverage. Wi-Fi also gives access to more capacity and more frequency bands. A very good example of this is the contract we closed in North America in Q4, where a North American telco operator will be using Wi-Fi as a complement to their existing coverage. It's a contract worth $1.6 million.
It's an example of a customer where we already had a relation in other areas, but where we are now cross-selling a wider portfolio. This time, we do it with our second last acquisition, Aptilo, a Swedish company, Aptilo, a leader in public Wi-Fi service management. That platform will then be installed to increase coverage and capacity for end users. We booked software licenses in the fourth quarter worth $1.2 million, and the remaining part of the contract will be recognized during 2023. I mentioned before our operating system business, which, although it is a smaller part than it was a couple of years ago, still is important, and we manage it for profitability and of course, for excellent delivery to our customer base.
We have two, what we call key customers, large customers, Ericsson and Nokia, where we serve, we serve their Radio Access Network and other parts of their mobile networks with our operating system, which is the foundation then for many of their products. With one of these key customers, we have extended the support agreement to three years. The value of that support agreement is SEK 60 million or SEK 20 million per year during three years. This is obviously positive news for us as well as for the customer because it gives a stable relation and a predictable delivery during the coming years. This should be compared with one-year agreements, which during 2022 was SEK 25 million.
Again, operating systems is on a declining path, but customers rely on our support and maintenance delivery during coming years, and we expect revenues then to continue during several years. Finally, in my introduction here, I'll just mention that we continue to enhance our presence on the market. We have recently been recognized by leading analysts, Gartner and ABI Research, as one of the key challengers and players in software for telecommunication and cybersecurity. We have run a campaign on energy savings and on how traffic management, in particular, can be used to get more out of mobile networks. In this difficult situation of energy, high energy prices, allow telecom operators to deliver excellent service, but perhaps at a lower OpEx. We have enhanced our web presence.
I welcome everyone to check out our new Enea.com web, where you'll find our key offerings, our key value propositions to customers, as well as other useful information also for the investor community. We continue to close important partnerships in the fourth quarter with American IBM and American Casa Systems. Enea will be teaming up to deliver private network solutions, including 5G. I mentioned before the role of Wi-Fi, so that's also something where we, thanks to our unique position and unique knowledge, communicate and help customers on the role that Wi-Fi can play as a complement with mobile networks. Finally, cybersecurity. I've talked a lot about that. We also strike partnerships in cybersecurity. In this case, we had a joint webinar with Intel, who obviously have cybersecurity as a top issue on their activity list.
With that summary of key events in the quarter, I leave it over to Ola Burmark, our CFO, to give details on the financial results. Go ahead, Ola.
Thank you. We came in in the fourth quarter with a net sales of SEK 271 million. Of course, this is a very strong, if not even the strongest quarter we have had in terms of revenue in Enea for several years. Q4 being historically also very strong quarter, but we can see to the graph to the left that we definitely have had a very obvious sequential improvement quarter-over-quarter 2022. The SEK 271 million represent a growth of 7%, and in a sort of currency adjusted, it is very much flat to previous year. There is a currency impact of about SEK 20 million, which is a pure tailwind due to the weakening of Swedish krona and the strong US dollars and euros, which we as a company definitely benefit from.
The other revenues are very negligible during the quarter, we do have some currency impacts and some other revenues amounting to some SEK 2 million to account to the total revenues of SEK 273 million. If we look further down into the revenue mix, we have the network solutions. Network solutions in total generated SEK 237 million in net sales in the quarter, compared to SEK 213 million the same quarter last year. This is a growth of 12% and currency adjusted, an organic growth of 3%. I think Jan stated that earlier, for us, it's very important. The network solution is our growth area. This is where we expect to grow in the future, we can now show a quarter where we have growth both in constant and in variable currencies.
For the full-year, we had sales of SEK 800+ million in network solutions compared to SEK 707 last year. That is also an increase over 13%. That increase is explained by two main factors. One being that the acquisition of Adaptive was consolidated as from second half 2021. Comparing 2022 to 2021 full-year, we only have half of the year in Adaptive in comparable figures. Also of course, a currency gain which we have had during the 2022. The other part being operating systems, we succeeded to make SEK 34 million in net sales in the quarter. It is still a decline, 16% versus last year. I would say the fourth quarter was also this part of the operation delivered over our expectations.
We're very happy with operating systems also in the fourth quarter. The decline adjusted for currencies was negative by 20%. Our sort of two key customers, they today represent about 27% of the net sales, they declined by 27% and represent about 1/2 of the sales in the quarter compared to like 60% last year. What we do see here is that the sort of tail business, which is consist of several customers, is very stable. Looking at the big picture, network solutions up 12% in variable currencies, and today it stands for 87% of our total sales. Worth stressing again, the organic growth in this area, network solutions, was positive by 3%.
Looking back, I think we saw that first quarter 2021, the previous time. We very much like to stress this. Looking at the profitability, EBITDA 38% margin in the fourth quarter or SEK 104 million. Also here we do see the sequential improvements quarter-over-quarter during the year. Margin-wise, we're not at the level we were last year, and this is very much explained by also that we have the negative impact on currencies on the cost side since large part of our operations is in U.S. and out in Euroland. Gross margins are down. We are reporting a gross margin of 77% in the quarter versus 86% last year.
It sounds and looks like a big difference, but we dig deeper into that one, we can see that it's actually negative impact by currency translations in 2022, and that was a slight positive impact the year before. Also, we had very high other revenues, which were related to COVID grants and R&D grants that we were given 2021. Adjusting for these, the gross margin is fairly stable. It's slightly down less than 2%. Spending-wise, we are still cautious when it comes to cost and we operate with , w e try to operate with a high efficiency and having a strict cost control.
If we look at the total operating spending, actually what we spend and pay out, with that means that we're excluding depreciation, amortizations, and provisions for incentive programs. The costs were reduced from SEK 105 in the fourth quarter last year to SEK 103, this year. That is actually despite also negative currency impact of SEK 7 in the SEK 103. We continue to have good cost control, and having that contributing to the margin and the profit increase over the quarter. EBIT compared to EBITDA, it is only the depreciation amortizations that differs, but I think it's important to show both. We landed here at 21% in the fourth quarter, and also here we definitely see the improvement quarter-over-quarter.
Earnings per share, as already mentioned, SEK 1.82 compared to SEK 2.54 last year, and for the continued operations, SEK 1.81 compared to SEK 2.44 last year. Cash flow was negative. Operational cash flow was negative by SEK 2.1 million in the quarter. That is very much explained, or it's fully explained by the high invoicing we had in the fourth quarter. We do see an increase in receivables, and what is positive with this is that the increase is all in sort of invoices not due. There is not that, you know, we see postponed customer payments or delayed. It is actually that it's fresh invoices that have increased, so that's very close to cash. The other thing is the prepayment of support contracts.
Last year, we were able to invoice and get paid for some contracts already before year-end, which we did not succeed with this year. I think especially we also spoke about the support agreement earlier on here, which was announced the 13th of January. That has now been invoiced, but previous years that has been invoiced before and paid before year-end. That definitely has an impact on the cash flow in the quarter. Our interest bearing debt amounts to SEK 550 million approximately, but we do also have plenty of cash in hand of SEK 230 million. The net debt today, or by end of the year was SEK 320 million, corresponding to a ratio of 1.1 to EBITDA, which also is an improvement versus last year.
We do continue to build a strong balance sheet in terms of equity ratio. Equity ratio has increased quarter-over-quarter. We're now at 69.1% ending 2022.
Thank you very much, Ola. Let me just then continue with a brief summary of our strategy and where we're headed. Starting off with some key factors and trends on the market that affect our business. Looking at telecom, the underlying factors for growth are there and will continue to be there. We see traffic growth continuing. We see pressure on OpEx, which also, in fact, drive investments because you need to invest in new technology to bring down OpEx, for example, cloud technology. We see new applications that require higher network performance coming. All in all, the fundamental drivers for continued investments in telecom remain.
However, we also continue to see a slow uptake of particular investment into 5G and 5G Core, largely because some of those new revenues that service providers have been anticipating have not yet materialized. We, in general, believe that it's only a matter of time before these things will happen. In cybersecurity, geopolitical tensions and remain and increase in cyberattacks remain high. Mobile networks are strategic in all countries of the world, not the least in the region we're sitting in, and therefore potential targets. The macro environment, I think we all know about that. We see increasing energy as well as capital costs. This does affect the market, it does affect our customers, and it has impacted decision-making as well as deferring investments. Our strategy remains.
We stand strong in the belief that we're on the right track being a software specialist, developing cloud native products in a world where many of the competitors still are compromising due to an installed base of hardware or proprietary cloud platforms. We strive for leading positions in everything we do. In telecom software for mobile core and security for mobile networks. In many cases, we are already recognized as a leader. In other cases, we are the challenger in the market. Global presence is important for us. Our business is all around the world. We're operating in a world where we can sell our software to all countries and all markets across.
We focus on North America and Europe with some of our business also in Asia because that's where we believe that there is growth, and that's also where we find the lead customers that we work in many cases, in collaboration with. We are strengthening the direct sales channel as a complement to indirect business, supported by distributed R&D that gives us proximity to the customer base. We execute on this strategy, and just in the fourth quarter, there were a couple of important proof points. As mentioned, several times, organic increase in network solutions with more software licenses and higher support revenue is an important proof point as a software specialist. Operating systems is also a piece of software which is important for us, and we do manage that for profitability now also with predictable revenues during the years to come.
The leading positions, as a challenger for the market, it's important to win new contracts and to work with the right, most advanced customers. The two published contract wins during the quarter are both evidence of that, both in the Wi-Fi area as well as in the cybersecurity area. We do see continued momentum in cybersecurity, and we're very happy with the development of our most recent acquisition, Adaptive Mobile Security. Global presence, is achieved with strong presence in key markets, and we do strengthen our presence in North America and Europe, which will allow us to cross-sell a wider portfolio. We do have some good evidence, not just in the fourth quarter, but in several quarters of last year. The brand is also important.
As a challenger, for customers and market to be aware of us, we have been investing into further brand presence, where our new web is one example of the efforts we've been putting in place during 2022. To summarize, our ambition is to be the leading challenger in the market for specialized cybersecurity and telecom software. We are already established with large customers, and we're gaining market share, largely through innovation, providing innovative solutions for open cloud-based systems of the future. We're up against, in many cases, some large companies and large competitors, but we've proven that we can beat anyone anytime by being more focused, faster, and more agile and attract the best talent.
In terms of outlook, our goal is that in the coming years to generate double-digit growth in network solutions, our most important area, as well as a strong profitability with an EBITDA margin over 35%. Strong cash flows. Over time, we also aim to make complementary acquisitions to further strengthen our market position, like we have done during the five recent years. For 2023, we entered the year with significant uncertainty, as does many other companies, about how the geopolitical situation will affect our business. All in all, we assess that we in 2023 will surpass previous years' sales and EBITDA results. With that, I thank you for listening and hand back to the moderator for question and answer. Thank you.
If you wish to ask a question, please dial star five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial star five again on your telephone keypad. The next question comes from Simon Granath from ABGSC. Please go ahead.
Thank you, operator. Morning, Jan and Ola, congrats on the Q4 results. A couple of questions from me. Initially, great to see the progress for Adaptive Mobile. I'm wondering how we should think about the seasonality for that business unit going into Q1. Is it fair to assume similar trends as in 2022? Should there be any other offsetting trends? Thank you.
Thank you for the question, Simon. Yes, seasonality is something which is part of our business. We have seen seasonality during 2022 most clearly. Traditionally, the fourth quarter has been the strongest quarter of our business, both from an order point of view, but also from a project delivery point of view. There is an element of seasonality in our business, and that also goes for Adaptive Mobile Security.
I could just add to that, Simon, that the smaller or the less significant operating system becomes of our total model, the more exposure to network solutions, which is also to the operator business, then we will get even more, you know, quarter-over-quarter fluctuations. I would say that trend remains as from last year.
That's helpful. Thanks. Can you also talk a little bit on the scalability for Adaptive Mobile as you now are growing revenue? How scalable is the business model in terms of customization, et cetera, when you acquire new customers?
Adaptive Mobile Security is basically a software business with high scalability. We do differentiate also on cybersecurity expertise, which makes us, in fact, unique on the market, so that we can help customers not only stop or filter automatically through software, but also to understand and analyze the results in order to take appropriate action. That is why we have a higher service element in the Adaptive Mobile Security business than in other parts of our business. It's due to expertise. Going forward, we see a large scalability. We see a potential to grow in software licenses. We may have to grow also in services and in expertise, winning new customers. We are working to further enhance the scalability also with techniques like artificial intelligence and machine learning, as an example.
It's interesting to hear that. Thank you. Also on the 5G Core topic, could you try to give some more color? I know that we've frequently asked this question, but what are operators claiming to be their main reasons for why they are hesitant in terms of investment? I know you don't make specific estimates, but is it fair to assume a gradual uptick in demand throughout the year, mainly for H2?
I think the key word in the 5G market is gradual. Like it has been for 2G, 3G, 4G, we will see a gradual development with 5G. 5G is a better standard than previous. It will provide new capabilities, more features, and in particular, the 5G Core standard is built for tomorrow's cloud-based platforms, which bring significant efficiencies also on the cost side for operators. In the short term, there has been hesitation for various reasons. One reason is, of course, the investment climate. Another reason is the complexity of putting this in place. There is some complexity in general in the market to put new technology into operation.
The good thing for us is that we are working with lead customers, some of the largest and most advanced customers, to make this happen. I still estimate that we will, with the build-out that has been done of 5G coverage on the radio side, there will be a gradual increase in capacity and investments also in the central parts of the network, in the core networks. That will happen over coming years with more capacity demands, more feature demands, and more efficiency demands in the networks. I believe that we, as a software specialist, are well-positioned to grab some of that market growth.
Thank you so much. As a follow-up to that answer, how should we think around the fact that some of your solutions actually help telco save energy? Shouldn't that be very relevant in the current environment and how are those discussions proceeding? Thank you.
We believe that energy saving is obviously an opportunity. It's an opportunity for our customers, it's an opportunity for us. Energy saving is a complex topic where there are different measures you can take as a service provider. I think the first thing to note is that the energy consumption of a service provider is quite significant. It's a large and growing part of the operating expense. With all you can eat kind of models, with data traffic increasing month-over-month, year-over-year, it is a concern that we have seen many of the large service providers to communicate in the recent earnings reports. We believe that we can be part of the solution.
We believe that, in particular, traffic management and video optimization can be used to moderate the increase in data consumption. In fact, in a way that it's not even noticeable for an end user using a small mobile device. What are the hinders? Well, one hinder could be just time to get this in place, to think through the investment, to think through the business case. Another hinder could in fact be regulation. There is this thing called net neutrality, which is interpreted a bit differently in different countries. That is being reviewed right now by many customers and many regulators.
We believe that hopefully with a more, with a more realistic interpretation of net neutrality, that will open up for more, for more customers being able to use this technique to optimize their services.
Great. Thank you so much. Just a final question from me, if I may. Given that you now look for an EBITDA margin in 2023 instead of an EBIT margin, how should we think around the difference between capitalized development costs and amortization of these? Thank you so much.
Well, you didn't come out very well there, Simon, but I think you were asking of how you would think about the difference between amortizations and depreciations.
Yes.
Was that the question?
The difference between EBITDA and EBIT.
Yes. As you are aware, we have invested significantly over the years in our product portfolio to build our sort of cloud native 5G offering and network database, data layers. Those investments are, you know, slowly or gradually sort of being more and more mature. These products are now being launched and therefore also they're starting to depreciate. This means that sort of depreciations will slightly increase over the coming year or even may even up to two years, maybe. Also we have from our acquisitions, as you mentioned, amortizations. The amortization is about SEK 50-55 million per year, and the depreciation is some SEK 120 million, SEK 110-120 million per year. All in all, you can add those two.
Thank you so much, both of you, for the great answers. Again, congrats on the strong results.
Thank you, Simon.
The next question comes from Jesper von Koch from Redeye. Please go ahead.
Good morning, gentlemen. Yeah, also congrats to the strong quarter.
Thank you.
Yes. Could you just elaborate on the financial target about the growth rate? Does the double-digit growth in network solution include M&A or is that as on top of the organic growth?
We believe that we are addressing some pretty interesting markets both in cybersecurity and in 5G. We see that over coming years, those markets will develop by double-digit growth, and we should be able to benefit from that from that market growth.
Okay. The double-digit growth is excluding M&A, M&A could come on top of that?
Correct.
Yeah. We have the ambition to do M&A when we find the right targets. We have a strong underlying potential in the current business that should be able to generate double-digit growth in the network solution for us.
Okay, good. Also, could you try to quantify what strong cash flow means? Like for example, the cash flow as a % of the EBITDA, not including M&A or something like that?
Well, we haven't set a target, what we do have, though, in our quarterly report is a measurement which is EBITDA less CapEx. I would say since we haven't set a target, I wouldn't sort of give you a number, but I would sort of point you to an area in the report which you should monitor.
I will monitor that very carefully.
Yeah.
Thank you. Good. Also just a question on network solution. I mean, showing strong sales despite not announcing that many deals during the quarter. Could you just... I know that there is also like a sea-seasonality effect, not least for Adaptive Mobile Security customer. Could you just elaborate on the sequential growth? Like, are any of the large contracts from 2020 starting to kick in and so on?
I can comment on that. I think there are several effects in this. The fourth quarter is, and has been traditionally the strongest, the same went then for 2022. There is some seasonality underlying. There were a few larger deals that we published because of the size and the impact. There are also, of course, ongoing business with our customer base of upgrades, capacity improvements, as well as smaller deals, where we also, in fact, win some new logos during the quarter. All that summed up to a strong development in the quarter. The larger deals that we had in 2020 did not, to a significant amount, contribute.
If you read the report carefully, you will see that was not an impact in the fourth quarter from past milestones, for example, which we did have in previous quarters during last year.
Okay, good. Then, operating systems, is there any, like, core fundamental reason for the sequential growth, in operating systems? Like from Q3.
from Q3, I think, yeah, we saw actually the same thing in the fourth quarter last year, and this means-
Yeah
... that the tail business, which still is some, almost 50 customers, some of them being small, some of them being less small, so to speak. You see actually both renewals, prolongments, and you, also see that some extensions, of contracts which normally take place in the fourth quarter. We see also this pick up in the sort of fourth quarter last year for this business.
Okay, good. Then one last about your cost base. You say that you recently hired, some pretty, senior people in both sales and marketing. Could you quantify, like, by how much should this affect OpEx going forward?
We have not given specific guidance on the cost base, but you should expect that investments in sales and marketing will continue to go up a bit like they have done during 2022. We do that in order to enhance growth, and we invest into growth. We compensate for that also with other efficiency measures. We've done that during last year, especially during Q1, but we did also, even in the fourth quarter, selectively take out costs, cost in management, cost in overhead, and all in all then that freed up capital and freed up firepower to invest into a stronger sales and marketing effort.
Jasper, we did report SEK 61.5 million in sales and marketing costs in the quarter compared to SEK 45 same quarter last year. I think we are in the fourth quarter very much reaching, I would say the wanted organization. We will continue to invest and focus in this area, but you shouldn't expect such a big ramp up as we have done, you see from the fourth quarter 2021 versus 2024. We're reaching this, the wanted and sized organization.
All right, great. Thank you so much for all the answers. Yeah, congrats once again.
Thank you, Jesper.
There are no more questions at this time. I hand the conference back to the speakers for any closing comments.
Thank you very much. Thank you for listening today. We're happy to have delivered a strong year-end results where we see the strength of our business, where we see how our strong presence with customers, new sales and cross-selling have contributed to a strong both top line and bottom line result. We thank you for following us this morning, and look forward to further communication and further interaction. Thank you very much.