Earnings Call: Q2 2021

Jul 16, 2021

Thank you very much. This is Jan Heglund, CEO of EMEA, and I will be joined in this call as said by Jan Westberg, CFO of EMEA. So we have just closed the Q2 and will be in this call presenting the Q2 results as well as the interim period, June to January to June. And we will be giving you a highlight of the key news during the quarter. On Page 3, we summarize the financial results of the Q2. Net sales amounted to SEK 226,000,000. The operating margin came in at 27.5%, a strong result Helped by a good revenue mix, good share of software revenues, also a favorable cost structure That helped to continue to reduce our OpEx. Our net debt to EBITDA was NOK43, a continued improvement. Earnings per share came in at NOK2.41. Operating cash flow was strong at SEK94 1,000,000 and we continue to invest In future growth, we continue to invest in R and D and about a quarter of all revenues are reinvested either expensed or capitalized. For the period, net sales amounted to SEK440,000,000. The operating margin to date is 24.3 percent, earnings per share SEK4.43 and operating cash flow SEK163 1,000,000. On the next page, I'll summarize the key events of the quarter, the key events that we've also published externally. I think the main event came in last night, which is the announcement that we have signed an agreement to acquire Irish company Adaptive Mobile Security, a leading provider of mobile network security. I'll be coming back to more details of that in this call. Beside that, in the quarter, we have a number of Exciting and important news, for example, that EMEA was elected and joined Telenor in the world's most diverse multi vendor 5 gs standalone core solution, together with other specialist vendor, we worked with Telenor to prove how best of breed solutions can be and should be used to build state of the art 5 gs core networks. We're very happy about that and we'll use that experience going forward also with other customers. In cybersecurity, We have a strong and leading position in traffic intelligence, which was awarded again in Cybersecurity Excellence Awards, the Global Infosec Award during the quarter. We're really happy about that. And I think it proves the point on us having the leading position in traffic classification software serving many companies across the world. During the quarter, we also published innovation in a key area for us, 5 gs core data management. As stated before, Eenea differentiates in having a world leading solution, which is cloud native And also complete adapted to multi vendor and open interfaces. And one of the key enablers for this is the innovation's virtual schema. It's a technical thing, but essentially what it does is that it allows The multi vendor environment of different applications from different vendors to build future 4 gs and 5 gs network data management systems. Traffic management is another area where EMEA has a leading position. Traffic management serves many purposes, optimizing the experience for end users and optimizing network utilization for operators. It can also be used for additional features, including in this case, parental control, which is an important part of controlling how especially children then can appreciate and use online communication. And we've done a survey during the quarter, which really has proven the need this and also shown the expectation from especially parents on what operators can and perhaps should do to protect children's consumption and communication. And we're happy that we're part of solutions providing exactly that for many customers. But let me continue and go more into details of the news from last night, the signature of an agreement to acquire Adaptive Mobile Security. On Page 6, I summarize a bit what the key features of Adaptil Mobile Security. It's a company in the The sweet spot between telecoms and cybersecurity, being a leading provider of mobile network security, really at the intersection of Telecoms and Cybersecurity. Adaptive Mobile Security is deployed with more than 80 mobile operators across the globe, protecting more than 2,000,000,000 subscribers, a very strong customer base and a strong position. It was founded back in 2006 and has around 135 employees With headquarters in Dublin, Ireland, but regional office in several places, including Dallas, Brno in the Czech Republic, Dubai and Hyderabad in India. The next page, I'll summarize a bit of Adaptive Mobile's financials. For last year, 2020, Adaptive Mobile's net sales amounted to €15,500,000 And the estimated sales for this year 2021 is €17,000,000 The operating margin is something we always work on with acquisitions and our estimate is that the operating margin of Adaptive Mobile Security will be close to Enea's operating margin during 2022. And we expect the acquisition to close during July, and therefore, we also plan to consolidate the acquisition as part of Enera during Q3 this year. The next page, A few details about the acquisition. The acquisition was done at an enterprise value of €45,000,000 It is financed by a combination of own cash and a new bank loan. We expect The acquisition to be earnings per share accretive from the Q4 this year. And as usual, there are a number of onetime Transaction costs, in this case, SEK 13,000,000, of which SEK 4,600,000 is a stamp duty in relation to acquiring an Irish company. On Page 9 then, a bit more about what the Adaptive Mobile Security Specialized in. It's a market leader in especially 2 areas. 1 is messaging security And the other is signaling security. Messaging security is really about preventing unwanted messages and traffic to us as subscribers, messages that can be linked to security threats, service abuse and revenue loss, a really important area where we all must be able to trust The messaging and where damage from this could have devastating consequences either for us as individuals or potentially also for enterprises. Signaling security is really about protecting the mobile networks itself and their subscribers. Mobile networks all communicate with each other. They're all connected. And that signaling must be protected in order to prevent That fraud is done, fraud either that can damage the entire network or fraud which could potentially endanger communication or the integrity of communication for individual users. So in brief, That's the area those are the areas that adaptive mobile secure, protect and have a leading position across different markets. And on this page, Just summarizing that there is no doubt that cybersecurity threats, as we all know, are An increasing area of concern and mobile networks is no exception to that. I think in surveys and media reports, We can see if not daily, at least every week, different reports of how cybersecurity threats are a concern of different societies, Different companies and also network infrastructure. And I believe personally that now with the advent of Also 5 gs communication, the importance of mobile infrastructure will increase even more, which of course enhances the need to protect So the communication not only to subscribers, but also to enterprises and networks. On next page, summarize the business models of Adaptive Mobile Security. These two areas, messaging security and signaling security is sold primarily in 3 models through software licenses, through managed services, supported then by a very strong threat intelligence team being able to understand, interpret and report the different security threats. And there are also business models based on cloud service software as a service. The customer groups are essentially 3. In the middle, mobile operators, which is the dominating customer groups, large operators across the globe, both in the U. S, in Asia and in Europe. But On top here, communication platform as a service provider that in many cases then are responsible for messaging 2 companies, enterprises and individuals, play a very important role and they also have a need to secure their communications. Companies like Twilio, for example, which also form part of Adaptive Mobile Securities customer base. And then finally, government National security agent, which in several cases have taken decisions then that there needs to be a national perspective on the protection of the mobile infrastructure. And again, that our adaptive mobile security with superior products and expertise can step in and help and support these organizations. On next page, we show how Adaptive Mobile fits with Eenea, Complements EMEA's strong position in software, especially for mobile core networks. And I'm happy to say that Adaptive Mobile really complements what we have in a very good way. Our leadership in data management is in fact linked nicely to Adaptive Mobile since the signaling protected by Adaptive Mobile in many cases then emerges and connects with the portfolio and the product that EMEA provides in data management. Another important touch point is our leadership in traffic intelligence, Traffic classifications and deep packet inspection, where again adaptive mobile solutions benefit from the technology where we have a world leading position already. From a customer base point of view, Page 13, Adaptive Mobile Security comes with a strong customer base and combined With the customer base of EMEA, which already includes many of the world's leading Tier 1 operators across the world and a number of partners. We believe that there are potential synergies here in cross selling and creating a stronger total Sales Organization, to generate new opportunities. The acquisition also means that we further strengthen The largest product group of EMEA, the network solutions, which has been growing in importance during recent years and this acquisition further consolidates that strategy and trend. So finally, summarizing on Page 14. We're very happy to announce this acquisition. We believe that it significantly strengthens us as a company, in particular then our cybersecurity portfolio. It creates a unique offering. Our 5 gs core position, our 5 gs core offering in combination with ADASI Mobile Securities, Strong position, technology and expertise creates a company which I think will have the opportunity to serve customers in a new and pretty unique way. We also get new customer base as well as additional sales capabilities targeting all kinds of operators, including Tier 1 telecom operators. And as mentioned before, we believe that there are also technical synergies, for example, with Eneas traffic intelligence technology and portfolio. So with that, we'll go more into details of the quarter. And I'll leave it over to you, Bjorn, to summarize the financial results for the quarter and period. Thank you, John. We continue on Slide 16. This slide shows net sales for the most recent 5 quarters. Net sales amounted to €126,000,000 It was 5% lower versus last year. But in fixed currencies, sales increased by 1%. Abseel contributed With €20,000,000 to the total sales number, you can say overall stable sales with flat organic growth in our largest segment Networks Solutions. Next Slide 17, starting with operating systems. As previously communicated, revenue continued to decline. Decline was 30%, mainly due to lower sales for our 2 key accounts, Ericsson and Nokia, together accounting for 82% of the Operating Systems segment sales. That decrease is expected as they both are, since a few years, building their solutions based on open source software. Netberg Solutions by far The largest product group and now representing 74% of total sales, as Jan mentioned, increased by 13% in fixed currencies, Driven by sales from the newly acquired Aptilia business from last year, generating 13%, the other product lines combined generating flat organic Growth. Software Development Services declined by 21%, mainly due to less sales in the U. S, driven by decline in customer segments being more affected by the pandemic than others. With the Aptiva acquisition, And now also with the acquisition of Adaptive Mobile Security, there is more evidence 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 offerings in network solutions. We operate in segments. We have now number 1 or top tier position. This is also a guidance for us and we are exploring on organic growth opportunities. Next Slide 18. Here's the EBIT development. David's margin was 27.5% in the quarter, even better than the Q2 last year. Comparing this quarter this year with last year, Dropey margin was positively affected by lower OpEx, while maintaining a similar gross margin. TUSA costs were lower in spite of a full quarter of the acquired Aptilo business generating which generated €9,000,000 in OpEx. The gross margin was positively affected by higher ratio of software sales versus services, balancing the negative impact of a higher D and A. Regarding OpEx, We see positive financial effects of the implemented efficiency programs from last year and less favorable cost for travel and events. EPS for the quarter was 2.41 percent, an increase by 11% versus last year, positively impacted by the increased operating profit. Continuing to next slide 19, financial position. We continue to generate good cash flows, still investing in our growth areas. The operating cash flow amounted to 94,000,000 an increase of 39% versus the Q2 last year. We have by the end of June Efficient financing structure with low financing cost and net debt to EBITDA of 0.43. Going back to the level before the Aptil acquisition in October last year, this generates good headroom for future investments. The strong balance sheet is also reflected in the equity to asset ratio of 67%. The Adaptive Mobile Security acquisition will of course Impact these key figures, but even after this still on very sound levels. To conclude, we have a very solid financial position, making it possible for us to invest in both non organic opportunities and also organic growth initiatives. Back to Bjorn. Thank you, Bjorn. So let me just summarize the way forward and outlook. We are a company, EMEA, a world leading specialist in software for telecommunications and cybersecurity. And the acquisition now of Adaptive Mobile Security, I think further strengthens and shows also that it's completely in line with our strategy to grow in these two areas. The enterprise value of €45,000,000 is based on the potential that we see for this company. And it strengthens our portfolio. It extends the market reach and we believe that it does create opportunity also in 5 gs network security. So last page, Page 23, the outlook for the year and longer term. I mean, we're coming from a period where the corona pandemic has caused delays in project. It has caused hinders for new sales. And it has also caused risks in earnings for us. And we believe that risks remain for earnings in coming quarters and variations can occur. Having said that, We believe we maintain the ambition to increase revenues compared with previous years. And we also maintain the ambition to continue to achieve an operating margin of above 20%. Longer term, we have a positive outlook of the market. We operate in interesting areas like 5 gs data management, edge virtualization, IoT and not the least now, cybersecurity. And we are well positioned to challenge established players and to increase our market shares. And that's why we have the ambition to significantly grow revenues through a combination of organic growth and accretive acquisitions. Our focus remains of the largest on the largest product group at Network Solutions, which we further strengthened with the acquisition of Adaptive Mobile Security. We our ambition is to continue to operate at an operating margin above 20%. And we maintain The financial target to achieve and surpass an annual turnover of SEK1.5 billion at latest by the end of full year 2023. So with that, we'll do the presentation. We thank you for listening and I'll give it back to the moderators. EMEA. And we have a few questions for you already. The first is from Simon Granat of ABG. Please go ahead. Your line is open. Good morning, gents, and congrats on the quarter. Initially, you reiterated COVID-nineteen continues to hamper investments. How would you say that conversations with customers have developed over the past month? Are you seeing any positive signs in just the recent time here? Thank you, Simon. I mean, we continue, of course, to work with customers. And I mean, we continue to develop our solutions. We continue to generate new orders and also to build on the footprint that we have. But I think overall, I think it can be said that the corona pandemic has put delays in the well, first of all, the ability practically to continue to move on certain large projects and also it has created some a bit more of conservative view on investments and new projects. For example, on 5 gs, which I think everyone agrees has been delayed by a year, if not more, overall on the market. And then, of course, what happens going forward now It's difficult to speculate with, but I think we all follow, of course, the positive development of vaccinations, etcetera. And of course, we hope that this will also continue to have positive effects on our industry. Thank you. You report solid growth of 15% quarter over quarter in Network Solutions. Is there any specific Area or products within Network Solutions that is driving this increase? Well, I think as mentioned, the acquisition we did last year of Aptilo, a leader in WiFi, subscriber management as well as growth ambitions in IoT, we're really happy with that acquisition. It continues to develop Well, it has a high ratio of recurring revenue also. So that's a significant contributor, as Bjorn mentioned, to the growth. In other areas, we have a world leading position, a broad customer base, and customers They continue to demand our innovation and also capacity increases, which gives us a good and healthy revenue base with high margins also that we are able to profit from. Thank you so much. I note that employers the number of employees, it is down quarter over quarter. Does this relate to any Specific area? And how should we think around net recruitment going forward, the underlying net recruiting recruitments, meaning Excluding Adaptive Mobile? But I mean, as previously announced, we had We continue to work on rationalizing the company. When you do acquisitions, there are potential synergies, For example, in various functions, in administration, etcetera. So that's something that we realized during last year, which then contributed also to a favorable OpEx position. So while we continue to invest in key areas in development in sales. We also see weather potential to rationalize and create cost synergies when we've done acquisitions. So I think that's what you see the result of. And now Adaptive Mobile comes in and adds 135 Competent colleagues with competence both in technology, product development, as well as He is in cybersecurity working directly with customers, and we're really happy about that. Thank you. And speaking of Adaptive Mobile, which of your own products do you see synergies with? And could you also talk a little bit about the company's historical sales trajectory and adding to that its margin trajectory over the past years? Well, first of all, the product synergies, I think there are several. I mentioned 2 in the presentation. 1 is the touch point with our The portfolio and leadership in data management, if you go a bit into the technology here, the products that we have, they actually in data management, They generate the signaling that Adaptive Mobile's product and expertise actually works on and secures. So there are some immediate possible integration points there that we will explore going forward. The other technical synergy is on traffic classification, where our leadership with the broadest A library in the world for deep packet inspection, traffic classification also potentially has the opportunity of adding capability and further enhancing the solutions of Adaptive Mobile Security. So that's also something we will explore going forward. In terms of revenues for Adaptive Mobile Security, we did not publish the full sort of historical revenues, but it's been revenues that have been Coming from these two areas, messaging and signaling, with good development, especially in signaling during recent years. And last year, the sales amounted to SEK 15,500,000 coming from Coming then obviously growing from lower levels since the company was founded and we expect them growth this year relative to last year. And now our job is to realize that. Thank you. And as Final question from me. When did the venture capital and private equity firms enter the company? And what have they accomplished in their time? I think the details of that, Simon, maybe Bjorn, do you have the details of that? No, I think we have to probably direct that question to these venture capital funds. So Yes, I can't really comment on what they have achieved there, Simon. So I think we gave here the details of the ownership structure, But I don't really want to comment on what they have achieved during this time. I can however mention one thing. I mean, We have seen some focus in the strategies last few years regarding to have more focus on recurring revenues. So I think that is one of the focus here last few years. That's a good point. Thank you for all the answers and congrats on the strong results and closing A very interesting acquisition. Thank you, Simon. Thank you. And the next question in the queue comes from the line of Jesper Hendrickson of Redeye. Please go ahead. Your line is open. Hi, and congrats to a strong quarter and the acquisition. And could you tell us And more about the technical synergies from the acquisition. Is that only for revenue synergies or does this also imply any cost synergies? Thank you, Jesper. I think the technical synergies are more on the solution side and then potential revenue. There is no product overlap between Adaptive Mobile Security and Enea as such. So we have no plans to rationalized as such, but rather to enhance. And as I mentioned, Adaptive Mobile's portfolio for Signaling protection connects well with our products for data management. I mean, in fact, when you go into mobile operator networks, They are directly connected. You cannot signal between data management of 2 different operators in different parts of the world without having protection in between. And that's exactly what Adaptive Mobile Security does. There are also on the messaging side, Parts of that signaling is also going to data management for subscribers, for example. So that's also part of the protection that is done. And then as I mentioned, we also have a leading position in traffic classification. And Traffic classification, as we've spoken about before, is more and more an integral part of Cybersecurity Solutions, because cybersecurity needs to be surgical. You need to take different kind of actions for different kind of traffic. And therefore, it's important to be able to classify and separate what traffic you want to, for example, optimize, what traffic you want to block because it represents security threats. So we're going to take that leadership we have and see how the combination of that And Adaptive Mobile has a strong position in security for mobile networks that can possibly create something unique then going forward. But we'll be coming back on that. All right, great. And in your outlook statement, you seem quite optimistic about 5 gs entering a new interest in Phase, perhaps with more procurement around your offerings. Can you tell us a little bit more about this and What you see and how far away you think that is? Yes. I mean, we believe that the evolution To 5 gs is inevitable. 5 gs will we have the opportunity of hunting services not just to subscribers, but also to businesses and enterprises. The new standards based on new spectrum, but also new ways of building the networks, in particular than 5 gs core, which is a standard and completely optimized for cloud deployment. Those are areas there where we see potential. I mean, we have positioned ourselves then as a leading software specialist with a portfolio in 5 gs core. And that creates an opportunity for us going forward, optimizing for cloud and also optimizing for multi vendor deployment. What this means is also that the market for best of breed solutions where different companies like EMEA can come in then and challenge some of the more established players. It might well be that the initial market goes to large established players because that can, especially now during pandemic times, perhaps see that a faster and more risk free option. But I think some of the initiatives like the one I showed in the call here from Telenor shows that operators are starting to and willing to explore also this new model of building more like a sort of app store based network. And that's where EMEA has the opportunity to play. Great. Thank you so much. That's all for me. Thank you. Thank you. Okay. There are no further questions at this time. I'll hand back to our speakers for the closing comments. Thank you very much, Mauritus. So thank you everyone for listening and thank you for the questions. We were happy to have been able to not only close the quarter, but also close an important acquisition, which paves the way for further development of our strategy to be and to grow as a leader in telecommunications and cybersecurity.