Earnings Call: Q4 2020

Jan 29, 2021

Thank you very much. So this is Jan Heglund, CEO of EMEA. And I have the pleasure of then announcing our Q4 results as well as the full year results for 2020. I'm joined here in our headquarters in Chista by Johan Westberg, our CFO, who will give more details of the numbers. Call. But let me first here on Page 3 of our presentation give the overview of our 4th quarter result. We ended the quarter with a net sales of SEK248,000,000, which is 4% down from last same period last year, but 1% up currency adjusted. We ended with a strong operating margin of 29.5% excluding nonrecurring items and a net debt to EBITDA of 0.81. Earnings per share amounted to 2.20, which is a significant improvement compared with last year, also contributed by a lower financing cost. Operating cash flow was SEK 62,000,000 and we continue to invest in growth opportunities in telecommunications and cybersecurity. So we put back about a quarter of our revenues into R and D, both expensed and capitalized. For the full year, net sales came out at SEK 915,000,000 and the operating margin, excluding nonrecurring items was 24.2%. So that means that we met our target of exceeding 20% for the full year of operating margin. Earnings per share was SEK 6.63 for the full year and operating cash flow SEK 274,000,000. On the next page, a quick comments on the corona pandemic, which, of course, still is ongoing and which also is affecting our market and affecting our customers. We continue to see delays in customer investments. So certain projects, including 5 gs and software upgrades are postponed by our customers. And this has an impact on our results and on our sales. We also have a smaller piece of the company, which is exposed to consultancy services. And in particular, we've seen customers in aviation industry in North America that have been heavily impact by the COVID crisis and therefore a lower demand for our consultancy. So we believe that these obstacles and hinders will persist as long as the pandemic has a significant impact on our key markets. Having said that, EMEA is a software company with a high ratio of recurring revenue, which means that the majority of our business remains stable, which we do see in our results. And we also continuously take action on cost. We've done that during the year, which is a contribution to the strong operating margin. Then some of the cost reductions that we have also are due to the fact that we have not been able to travel as planned and also that many events have been canceled during the year. And these are, of course, the effects that are due to the corona pandemic, which hopefully then will, as soon as possible, go back to more normality. On the next page summarizing some of the key events in the quarter. We did close an important contract, an upgrade contract with a North American service provider in the area of video traffic management worth in total USD 4.5 4.1 $1,000,000 In data management, we closed another significant contract worth €1,900,000 with the European subsidiary of a UK based Tier 1 service provider. Our latest acquisition, Aptilo, was closed on October Q1st. And we did, through that acquisition, take a significant contract for Wi Fi subscriber management with an EU authority. And this contract expects we expect it to generate annual revenues of between EUR 500,000 and EUR 1,000,000 over the next 4 years, starting 2021. EMEA works with a combined go to market model of direct and indirect sales. So partnerships is important for us. And during the quarter, we closed another strategic partnership with the American charging solutions specialist, Matrix. And the ambition here is that our combined solution for policy management and charging will be offered to customers in 4 gs and 5 gs. And then we did also, during the Q4, streamline the EMEA organization. We have then selected 2 business units, 1 for enterprise, 1 for telecommunications. We have a new service provider sales unit with even more customer focus in that area. And we have, as communicated before integrated Actilo, our latest acquisition, as an additional and separate business unit for continuity for customers and employees. So let me go a little bit more into detail into some of these news. On the next page, Page 6, summarize a bit of the traffic management upgrade contract in North America. The whole value that we generate with traffic management is very much about alleviating the congestion. With growing traffic in many parts of the world, especially now during the corona pandemic, it becomes even more important for operators to manage the end user experience as well as cost for delivering video services, which is the dominating part of the traffic in mobile networks. Contract. This particular contract then was worth USD 4,100,000 of which USD 0.9 million were recognized Q4 2020, and we expect the rest then to be generating revenues during 2021. The next contract on Page 7 that I touched on is a cloud data management contract worth €1,900,000 this is with an operator in Europe. And the whole value here is about creating flexibility and openness, in particular for open key for open and multi vendor applications and cloud platforms. This is where EMEA takes a unique position with our solutions through open interfaces, through agility and through cloud native software. This both brings flexibility to our customers, but also efficiency and cost benefits. Out of this contract value of SEK 1,900,000,000, 0.9 core revenue recognized in the Q4 of 2020. On the next page, Page 8, We summarize a bit of our latest acquisition, Aptilo. We believe that Aptilo is off to a good start. We integrated this as part of the company from October 1. And this unit generated revenues of SEK 21,600,000 in the quarter, which is slightly above our expectations. We're happy about that. The revenue portion is a high has a high proportion of recurring revenue, and we also see that growing capacity needs with the customer base have also contributed. As mentioned before, Aptilo did close a new frame contract with a new authority. This is about subscriber management as a service in public Wi Fi networks in Europe. And we're excited about this contract and will it will be interesting to follow and support the development of this contract over the next 4 years. And finally, Aptilo drives innovation, in particular in the areas of Internet of Things and Smart Cities. And during the quarter, several awards have been given to Aptilo for its innovation in these areas. On Page 9, a few words about the partnership with American charging specialist, Matrix. EMEA has a portfolio for cloud native applications, including policy control for 4 gs and 5 gs. Matrix has the same focus with cloud native software applications, but in the area of charging and charging functions. And these functions go together in many cases in operators' networks and also in fact in commercial tenders. And the ambition with this partnership is that we will be together able to offer leading solutions, software oriented to operators across the world. Finally, before I hand over to Bjorn on Page 10, a few an update on our strategy for 5 gs. EMEA has the mission to work in 5 gs and in particular to act as a challenger and disruptor. And there are many trends for us to work on. One is the importance of data in future operators revenues. And here, the EMEA disruption of being first to launch a 5 gs data management portfolio is very important, and we continue to focus on this as a key area for investment and growth. Another trend is operators going away from 1 stop shops or silo based networks into more of a multi vendor or best of breed way of purchasing and building networks. And here, the fact that we focus on specialists on specialize on a few areas and that we've also been able to prove that we can take contracts with large Tier 1 operators like we did during last year in North America and Europe gives us confidence to continue in this area. Video is a key area for EMEA. We are world leading in video traffic optimization, video is a growing piece of the network, and we continue to see growth, and we expect to see growth also with 5 gs, which gives more capacity in the networks. And the fact that we are incumbent with 8 out of 10 of the largest operator groups also gives us opportunities going forward. And then finally, 5 gs is designed not only for mobile traffic, but in fact, as the backbone for several access types, including Wi Fi and fixed access. And the acquisition that we have done now of Aptilo, specializing in Wi Fi subscriber management, gives us a pretty unique position to be able to offer solutions for Wi Fi as well as cellular access, both for subscribers and also for Internet of Things. And this is something we intend to explore going forward as a growth opportunity. So with that strategic update, I'll hand over to you Bjorn for more details on the financials. Thank you, Jan. This Slide 12 shows net sales for the most recent 5 quarters. Net sales amounted to €248,000,000 which was 4% lower than last year. But in fixed currencies, sales increased by 1%. UpThaler contributed 21,600,000 total sales number. There was an effect of the corona pandemic as some customers have delayed certain projects, both large investments like in 5 gs and also upgrade projects. On Slide 13, starting with operating systems. As previously communicated, revenue continued to decline. The decline was 28%, mainly due to less base for our 2 key accounts, Ericsson and Nokia. That decrease is expected as they both are, since a few years, building their solutions based on open source software. Network solutions, by far, the largest group product group now and representing 70% of total sales increase by 11%, driven by sales from the newly acquired Aptila business. The organic growth, excluding the Aptila acquisition, was 1% in the quarter in Network Solutions. Software Development Services, previously named Global Services, declined by 15%, mainly due to less sales in the U. S, driven by decline in customer segments being more affected by the pandemic than others. This quarter, it's even more evident than before, the Aptil acquisition that we have transformed the business from a large dependency of operating systems some years back to a company where we have a wide range of high quality offering network solutions. We operate in segments. We have a number 1 or top tier position. This is also guidance for us, and we are exploring more inorganic group opportunities. On Slide 14, we present the EBIT development. The EBIT margin was 29.5% in the Q4, excluding NRI, which is clearly above 20% being our objective. Comparing Q4 this year versus last year, the margin was positively affected by lower OpEx and negatively affected by lower gross margin. OpEx excluding MRI of SEK 9,000,000 decreased by SEK 26,000,000 compared to the Q4 last year. We see the effects of the implemented efficiency programs in combination with a higher level of our respective projects being capitalized. It did also have a positive effect on the cost for the LP per share program as there are fewer participants of the organization of our business units. EPS for the quarter was 2.20, positively impacted by the increased EBIT and the lower financing cost. Next slide 15. We continue to generate good cash flows. The operating cash flow amounts to SEK 81,000,000 an increase by 70% versus Q4 last year. We continue to have in place a very efficient financial structure with a new financing cost There's still a significant headroom for potential acquisitions. The strong balance sheet is also reflected in the equity deficit ratio, To conclude, we have a very solid financial position, making it possible to invest in both non organic opportunities and our organic growth projects. Thank you, Bjorn. Call. So wrapping up on Page 17, summarizing 2020. It's been an eventful year, no doubt, and the market dynamics caused by the pandemic have affected us as well as our customers. We have seen delays in customer investments, and we've seen projects and software upgrades also being postponed. And as mentioned before, we expect these effects to continue as long as the pandemic has a significant impact on the market and it does cause uncertainty in the coming quarters. Team. Having said that, we believe that we have, through strong performance, confirmed our strong position in 5 gs data management, video traffic management and DPI, Deep Packet Inspection for cybersecurity. And we've seen the sustained market interest for our virtualization platforms during the year. Due to this long term positive market outlook, we also continue investments in these areas. We continue to invest in 5 gs data management, 5 gs core applications as well as virtualization platforms. And we also took yet another step towards acquiring complementary businesses with the acquisition of Aptilo on 1st October, Aptila being a specialist in Wi Fi and Internet of Things, subscriber management. This strengthens our data management portfolio, and it also adds new customers and sales capabilities. Financially, as Bjorn mentioned, we were able to reach and maintain and exceed our target of an operating margin above 20%. We have seen a negative impact on our sales from the pandemic as we announced and expected early in the year, we've continued to generate strong cash flows, and we have a relatively low net debt to EBITDA created by a solid position in the period of macroeconomic uncertainty. So going forward and looking into this year, 2021, on the next page. As mentioned, we believe that the uncertainty in the short- to medium term is substantial because of the corona pandemic. And its consequences will probably cause further delays in customer projects and other negative effects on our businesses, risking impacting earnings through coming quarters. Having said that, we believe that we can generate a sales growth year over year and an operating margin of over 20% for 2021. If we look longer term on the final page here, we believe that the positive market outlook for data management in 5 gs virtualization as well as advanced cybersecurity means that we're entering an exciting phase where we as a company can challenge established competitors and where we can win market shares with innovative products and new business models. And therefore, our ambition is to increase revenue robustly through the coming years with an operating margin of over 20%, and we will do that through organic growth in our largest area, Network Solutions, plus complementary strategic acquisitions that advanced our market position. And we translate this ambition Q2 passing yearly net sales of SEK 1,500,000,000 by 2023. With that, I thank you for listening and give it back to the operator if there are any questions. Thank you for listening. Thank call. We have a question from the line of Frank Malo from DNB. For a good report here. And I think my question really has to do with cybersecurity now. Work. In the wake of these quite dramatic events in the U. S. That has come out to the media regarding the SolarWinds hack, Would you expect your threat detection business based on DPI to thrive from that? Yes, that's basically the question, if you will get a boost from what's what will happen there. Thank you, Frank. Yes, it's a relevant question. We've during the year surveys and asked operators and enterprises how they see cybersecurity. And no doubt that the threat of cybersecurity is continuing to increase and the latest events in the U. S. Unfortunately shows the how real that is. What our customers have told us is that the ability to look into traffic, to classify traffic to be able to distinguish as the friendly traffic from unfriendly traffic is very important. And more and more of these advanced cybersecurity applications depend on the kind of technology that we belief that we are leading in, which is traffic intelligence and traffic classification. So we continue to work in that area serve our customers. And we hope that we can be part and also cyber securities that can beat down these threats. Our next question comes from the line of Victor Vestman from Redeye. Please go ahead. Thank you. Good morning. Congrats on the strong report. I'm wondering about the sales target for 2023. If you can say something about the role of M and A here, should we expect similar M and A trend as before or will there be smaller acquisitions? We have done thank you, Victor. We have done acquisitions during the recent years. We've done about once a year, and they've been varying in size, but I think they've all had the characteristics of sales that have been and also complementary from a portfolio and customer base point of view. So this is typically what we're looking for. And we believe that we have the ability not only to carry through acquisitions, but also to do a successful integration where we have a strategy and a method and a process to do that going forward. So I mean, our ambition is to continue to do complementary strategic acquisitions that complement our customer base and that complement our offering. And we believe that we have a financial position that allows us to continue to do that. But having said that, we will continue also to be selective and picky to make sure that the businesses fit well with the company. Yes. Okay, good. Can you comment on the sales in Asia that were down 32%. This teams a bit maybe counterintuitive thinking how well they ended up the pandemic. So any comments there would be very helpful. We have variations between the quarters. So not too much should be read into individual quarters. And then, of course, Asia is a large part of the world where there are different countries. For example, Kinea has relatively low exposure to China, where I think, as you mentioned, then the pandemic has been perhaps the economy has recovered after the pandemic. So there are different markets and different customers, but I would say it's mainly an effect of variations between quarters. Okay. And last one then maybe on the network data layer contracts. We have not seen anything more there since the 2 big contracts you announced last year. Is there any delays in the market here? Because I remember you mention that I think 30 something percent of the operators were going to introduce Or yes, introduce this kind of functionality or how we say it. So can you comment on that also? Yes. Well, first, I think there are several comments to be made. One is that there are long sales cycles in our industry, typically 12 to 18 months. So that means that we are involved with several opportunities across the world in all areas where we operate, including 5 gs. Then we have said seen delays during the year on the market due to the pandemic. We have seen delays in projects and in investments, and that includes 5 gs investments. And that has affected us and our customers also. But having seen having said that, we have a positive outlook still for our markets where we operate, in particular for 5 gs, where we believe that 5 gs will help the market operators and also adjacent industries to realize new economic potential. So we therefore continue to invest in this area, and we see it as strategic as it has been before. Great. Thank you. And we have one more question from the line of Ramu Kuria from SEB. Please go ahead. Thank you, operator. Good morning, guys. Thank you for the presentation. A few questions from my side. Just First off, a clarification here. I mean, the net sales ambition for 2023, is that sort of to deliver at least 1.5 In the full year of 2023? Or is it some sort of a run rate at year end or whatever? Now we formulated as a net sales in the full year of 2023. Okay. Understood. Is it possible to say anything in terms of EBITA margins given presumably amortization levels coming up on the back of what I would expect to be more forward leaning M and A also moving forward. And we had some impact now both I mean, we had the smelterina in the Q4, but we also, as mentioned before as well, that we have lower low activity in marketing events and also travel expenses, etcetera. And also this quarter, we had quite much lower cost for the share center program. But in spite of that, we have a good margin. And also, of course, I mean that looking on the R and D expenses, but then as we have a very attractive investment portfolio. We are capitalizing more in these big projects as well. So looking ahead, I mean, the OpEx, of course, could be in transit if you come back to the more normal circumstances like travel expense, etcetera, travel, etcetera, and so on, capital increase. So we don't have a specific target for the EBITDA margin, but we believe that we will be above the EBIT margin of 20% quarter as well. Is it for 2023, is it sort of fair to assume that, let's say, amperesion to sales In more detail where Can you please repeat that, Romain? Yes. So I mean I would assume that a Pretty big delta on our current sales estimates for 2023 versus your new ambition stems from, well, us not including unannounced M and A in our numbers. So let's say that a chunk of that delta comes from M and A and you do M and A in the coming 2 years, give or take. I would assume that amortizations from acquired customer relationships, etcetera, and other intangibles, of course, increase as well. And you're saying that you're targeting an operating margin of above 20%. But is it possible to narrow that operating margin target down a bit and talk about EBITA margins. Perhaps you can do it offline if you want to. Maybe you can come back to that offline or for the next quarter. Sure, sure. So just a final one on the topic of 2023 ambitions. Is it possible to put any numbers or provide us with any flavor as to how much of sort of M and A 1 should perhaps expect for you to reach these targets. And if conversely, perhaps an easier question, what's the organic growth rates we should expect for Network Solutions, in your view, normalized, let's say, in 2022, for instance. Okay. So we have not published a sort of separation in organic and inorganic growth, but we believe then that organic growth in Network Solutions will be a significant contributor based on the fact that we see growth opportunities. And we see markets where parts of the market that we address are expected by external analysts to have double digit growth. So that will be one contribution. And then on top of that, then we seek complementary acquisitions. And given our position, then we believe that we have the ability headroom to address acquisitions going forward also like we've done in the past. That's very clear. Thank you, Jan. And finally, on the OpEx side from my side, I mean, Bjorn, you touched upon it in your first answer. But I I mean, it's super impressive what you're doing on the OpEx side. Could you and I'm sure I've asked this before, but could you just talk a bit about sort of The savings year over year, how much stems from reorganizations and structural changes you've done at the company? And how much stems from pandemic related savings, if you will. We don't have an exact number of the split here, but I mean, I can't talk about the different areas there, different P and L lines. I mean, starting with sales and marketing, I would say there, I mean, We have, of course, sales in this year, but 2020, but even more going forward as we are able to sort of offer more services for the same people, more or less. Then, of course, we have maybe the largest impact here for the pandemic that we have less marketing events and less travel expenses. Looking on R and D, that is more the sort of efficiency programs, especially implemented beginning of the year. So that is that main portion. And of course, as mentioned as well earlier in the call that we have I think they have the best organic portfolio ever for EMEA. And therefore, they are capitalizing more because we have these very interesting projects. So the impact of pandemic is a bit less there, you can say, compared to sales and marketing. MG and A, I mean, the big we are working with the sort of cumulative efficiencies. And so I would say there's also not much the pandemic impact there. It's more about that we are becoming more effective in the systems we have at that. It's very clear. Perfect. Thank you so much both. And as there are no further questions, I'll hand it back to the speakers for closing remarks. Call. So thank you very much for listening. We closed the year, which has been eventful with pressure on our top line. But with thanks to early actions on the cost base and, of course, working hard with our customers and bringing in new contracts, we've enable then to announce the result with a pretty strong operating profit as well as operating margin in the 4th quarter. We have a positive outlook for the long term based on the opportunities and the investments that we have done. But of course, we're humbled to the uncertainties that we see in coming quarters. The fact that the corona pandemic is still causing lockdowns in many parts of the world does have an impact on us, on our operations and on our customers. And of course, thanks to being a digital and software company, we've been able to adapt in a good way and so have our customers. But of course, it puts pressure and introduces delay in our business. So but all in all, we thank you for the interest our company, and we will work hard to bring us forward. Thank you.