Earnings Call: Q1 2021

Apr 27, 2021

Quarterly report

Thank you very much. Good morning, everyone. This is Jan Heglund, CEO of EMEA. And I will be joined in this call also by Bjorn Westberg, our CFO. In this call, I will give a summary of the main events during the Q1 of 2021, including the financial figures. Jan will be going more into details of the financial results, and we will end with a summary and an outlook for the year and also open up for questions after this call. Call. Starting with Page 3 of the material, a summary of the financial results for our Q1 of 2021. Our net sales came in at SEK 214,000,000, which is a 4% increase relative to the same period last year, currency adjusted. Though it should be noted that this quarter this year includes revenues of about SEK 18,000,000 from Aptilo, an acquisition we did in October 2020. In the Q1, we did reach an operating margin of 20.9 percent, which is above than our target of 20%. This corresponds to an operating profit of SEK 45 SEK1 1,000,000, which is up by 21% without nonrecurring items and currency adjusted relative to the same period last year. And our cash flow continues to be steady, SEK 69,000,000 for the quarter. Earnings per share came in at SEK 2.02. We improve our net debt to EBITDA relative to the previous quarter. We are now at 0.62, which gives us the opportunity also to continue investments. EMEA is an R and D intensive company, and we continue to invest into growth opportunities. And I'll be talking about some of those in the next page. Our total investment in R and D, both expensed and capitalized, amounts to 28.6% of net sales. On the next page, a summary of some of the announcements that we have done during the quarter. We have announced an offering that we call 5 gs MicroCore that targets the private enterprise market, which we expect is a growing opportunity during coming years. We've also launched a new offering in collaboration with hardware supplier, conference, where we combine our virtualization software with Nexcom's hardware platform scanned applications based on open source to create a very cost competitive SD WAN, software defined wide area networks offering. Also for our virtualization platform, We have extended the software with additional features and services, which gives us the opportunity to target a wider market beyond SD WAN. We also see the opportunity to go into carrier WiFi, private 5 gs as well as video analytics. Enea has a world leading position in traffic intelligence and one of 1 in a row of customers is NetQ Pro, a Polish company delivering services for service assurance in the mobile industry. And we're very happy to get yet another customer on board. Call. And finally, our latest addition to the company at Telo has a growth investment in IoT, the Internet of Things. And we're very happy to be part of a solution that recently was launched by Swedish operator, Telia. So let me go a little bit deeper into the first and the last of these two announcements. Starting on the next page with our launch of the 5 gs MicroCore. Eenea is a software company where our software for 4 gs and 5 gs is completely built for cloud, cloud native, which has a number of benefits then, completely multi vendor, There is no lock in in what we do. We are an independent software company. It gives Telco great stability, security for data storage, easy deployment, seamless integration and a number of key features and also the flexibility to deploy this on multiple cloud platforms. There are a number of trials taking place across the world, especially in Asia, where the market activity is particularly high. We are part of a number of trials also together with partners and system integrators. And we expect that the market for this will growth during the coming years with commercial deployments, although it should be said that the market is still in very early stages. Through the Aptilo IoT Connectivity Control Service. It is a part of our Aptilo portfolio that enables policy control and security features for the Internet of Things. So Swedish operator clearly has recently launched a service targeting enterprises and we're proud to be part service with our Aptila IoT CCS. And what we contribute here is really the opportunity to, in a very flexible way, provide secure connections for enterprises, connections that, in fact, these enterprises can self managed. We do this in partnership with the security provider Fortinet. And we believe that the total solution here is competitive. And we're, of course, hoping that this deployment will serve as an important reference also to other operators targeting the IoT market. Call. With that, I hand over to Bjorn Westberg to give more details into the financial results for the Q1. Go ahead, Jan. Thank you, Jan. Slide 8 shows net sales for the most recent 5 quarters. Net sales amounted to SEK240 1,000,000, which was 3% lower versus last year. But in fixed currencies, sales increased by 4%. UpToelho contributed €8,000,000 to total sales number. Overall table sales did an organic growth of 4% in our largest segment, Network Solutions. On next Slide 9, starting with operating systems. As previously communicated, Revenue continued to decline. The decline was 25%, mainly due to less sales for our 2 key accounts, Eriksen 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. Network Solutions, by far, Lardisprudegroup now representing 6% to 8% of total sales, increased by 12% in 6 currencies, driven by sales from the newly acquired Wi Fi business, a particular generating 8% and organic growth of 4%. Software development services declined by 70%, mainly due to less sales in the U. S, driven by decline in customer segments being more affected by the pandemic some others. This quarter is still more evident than before with our key acquisition that we have transformed the business from a large dependency Corporate Systems some years back. It's a company where we have a wide range of high quality offerings in network solutions. We operate in segments. We have a number 1 or top tier position. This is also guidance for us when we are exploring non organic group of opportunities. On Slide 10, we present the EBIT development. David's margin was 21% in the 1st of this quarter, clearly better than the Q1 last year. Comparing conference this quarter compared to last year. The margin was positively affected by lower OpEx. We also see an effect of the implemented efficiency programs from 20 country. EPS for the quarter was 2.02, an increase by 152% versus last year, positively impacted by the increased EBIT. Continuing to next slide, we have some more details on gross margin and OpEx development. So on Slide 11. Gross margin was not far from Q1 2020. So this quarter, 6% to 8.1% versus last year, 6% to 8.9 and that included the NRE last year. The key factors normally affecting the gross margin are level of sales, revenue mix and changes in depreciation and amortizations. We had a positive effect from the revenue mix at the software development services, which has a much higher cost of sales. That part of the Sales decreased from 17% last year to 14% this year. D and A increased due to the impact of last year's acquisitions. With also a positive effect of last year implemented efficiency programs. OpEx decreased in spite of SEK 9,000,000 more OpEx from Aptilo. We have effect in all OpEx lives of the implemented activity program from last year and less cost per travel and events. On Slide 12, our financial position. We continue to generate good cash flows, still investing in our group areas. The operating cash flow amounted to SEK 69,000,000, an increase by 11% versus quarter 1 last year. We have a very efficient financing structure with a low financing cost and a net debt to EBITDA of 0.62. So even after Aptial acquisition in October, there is still significant headroom for potential acquisitions. Just on balance sheet, it's also reflected in the equity to assets ratio, which is still pretty high even after that pre acquisition. To conclude, we have very solid financial position, making it possible to invest in both non organic opportunities organic growth of product products as well. Back to Jan. Thank you, Bjorn. Flow, way forward and outlook. On Page 14, we maintain a positive view of the market in Telecommunications and Cybersecurity. And this is driven by many things, but including also the growth that 5 gs will generate. We've in fact done a survey together with leading analysts and leading operators during the quarter, asking the questions about the key trends that will follow during the next couple of years. And some of the things that came out from that survey was unexpected growth in things like cloud gaming, group video calling as well as private 5 gs that I talked about before. In fact, for the service of mobile cloud gaming, the prediction is that there's going to be a 5 fold increase just in the traffic for that service. Another parallel trend is the growth of encrypted traffic, which probably will represent about 93% of all Internet traffic by the end of 2021. And with this growth and also the growth of the number of devices driven by the Internet of Things, we expect that there will be continued investments into 5 gs core, which will also drive one of the key areas for EMEA, namely data management. Call. All in all, on the final page, Page 15, we continue to take a positive long term view of the market. We see growth in 5 gs data management, edge virtualization, IoT and cybersecurity. And as an independent software company, We are confident that we can challenge established players and increase our market shares over the coming years, which means that we maintain our ambition to significantly grow revenues, both organically as well as through strategic acquisitions, especially then in our key area of network solutions, while maintaining an operating margin above 20%. And the target that we set for ourselves in the previous quarter to reach a turnover annually of SEK 1 €500,000,000 at the latest of the end of full year 2023 is still our ambition. For 2021, I think we all know that we are still in a situation where the market is affected by the pandemic. We do see delays in projects and investments and the risks that we have previously seen and talked about for earnings. We also see them as long as the pandemic has an impact on the market and on our customers. Having said that, we do maintain the outlook of increasing revenue for 2021 relative to last year, and we do maintain the target of achieving an operating margin above 20%, something that we were able to achieve now as stated for the Q1. So with that, we are through our presentation and we are ready to take questions. Thank you very much. This this. The first question comes from the line of Frank Mahl from DNB. Please go ahead. Your line is open. Yes. Hi, good morning, everyone. So my question relates My first question at least relates to your outlook statement, which you comment to Don just now, but also to the wording in the report itself for the CEO outlook commentary. So there seems to be a kind of sharpened call around or increase the reservation level, I would say, when it comes to the impact all the pandemic and the risks in earnings related to that compared to the Q4 report at least. So how should we interpret that? Do you see anything that has changed over the course of the last 3 months And when it comes to that, that has made you less optimistic or more pessimistic around the risks for the remainder of 2021. And that's the first question. And the second question is really also in the CEO words, you talk about risks to the short term and medium term. Could you please elaborate on or explain how you define medium term here? This. That would be helpful. Thank you. Thank you, Frank. Well, I'll start to Jan here, and then Jan, you can fill in. So when it comes to the outlook, the intention was not to change any tone relative to the previous quarter. So if that is how it's come across, then that was not the intention. I think the wording should be, at least in Swedish, identical. So I mean, the intention is to state that we have seen the effects of the pandemic. I mean, we Everyone works from home and although that works fine for us and most of our customers, but it does, of course, change some of the practicalities about how you can efficiently move, touch and upgrade your networks. And it has changed the priorities in the market in some way. It has also affected, to some extent, the investment climate, and I think we have seen some clear evidence of delays, for example, in 5 gs investments, 5 gs auctions, etcetera. So I think there is an underlying uncertainty. And I think what we wanted to say in the previous quarter as well as in this quarter is that these effects, we assume that they will continue to be there as long as the pandemic has a significant impact on the market. And then exactly how long that will be, I think it's difficult for everyone to predict, although we as everyone see light in the tunnel for the pandemic. Call. So the definition of short- and medium term, I'm not sure we have a clear and sound definition of that. But I mean, in the outlook, we separate the long term where we have set an ambition for the full year 2023. And then we also talked about this year 2021. I think those are the key points that we want to give at this time. Okay. Thanks for the clarification. Thank you. The next question comes from the line of Victor Westman from Redeye. Please go ahead. Your line is open. Thank you and good morning. I wanted to ask firstly about status. If you can comment on the status of the network data layer area. I was expecting there to be at least some news here during the past period. But I know there's a pandemic, but can you comment on the status here and if your positioning and competitiveness is the same. Sure. Here. Network data layer and 5 gs data management is an area that we've talked a lot about. It remains a key area for EMEA. We continue to invest in that area. And we had a number of announcements during last year of key and big contracts. And we are very much in the delivery mode of those projects. Our intention is to continue to deliver on these projects as well as use these as references for other opportunities on the market goals. And we are working on those opportunities as we speak. Having said that, we have also previously talked about the effect on the pandemic on overall delays on the market when it comes to 5 gs and in particular, 5 gs core. And that has a link to network data layers. So We believe that the market is still there, the opportunity is still there, but there may be some delay also caused by the pandemic that has an overall effect on the market. One. Thank you. And I was curious if you could say something about the potential for the new products. I'm thinking about the connectivity control service and the MicroCore. And Firstly, if you can say something about the deal size and addressable markets, etcetera. And maybe if you can put it into perspective with the network data layer deals that you had, if these are significantly smaller or larger, etcetera. Well, I think they are a bit different in nature if we talk about the private network market. It's a market in in very early stages. And as I mentioned, there are a number of activities, trials, etcetera, going on across the world, including Asia. And that the expected growth market growth will happen during coming years. Here, perhaps the individual deal sizes are can be quite limited, but there is a potential of having quite many of them on the market when this takes off and when the adoption of private networks and in particular built on 5 gs standalone technology take off on the market. So again, early stages, but opportunity for a growing market, I think as reported also by many, many analysts and many other suppliers in the field. When it comes to IoT, I think it's the same thing there that operators across the world have been since several years watching the IoT as a potential growth area, as many have tried. And I think there are many of them that have initial offers for the Internet of Things. Now what we see is perhaps the next wave of offerings like the one from Telia with more advanced services, for example, based on eSIM so that you more easily can provision devices for global connectivity. And also what Telia has done then as an example is to provide a more secure and flexible way of establishing connections to your devices wherever they may be in the world. And that's where we come into play. Our solution helps operators provide that self managed secure connectivity to different global devices. And we hope and expect that that kind of service and offering will be needed by many operators across the world. So again, the individual deal sizes maybe limited, but there are many potentials out there. And it's a market in still very early stages. Revenue potential over a number of years. Yes. And maybe also a last question on 5 gs. And obviously, it's, of course, a long term structural trend. But can you say if there are any specific inflection points to watch in the 5 gs market, when and what. Well, I think what normally drives the adoption are quite fundamental things like the spectrum availability, device availability. Those are 2 important factors, of course that drive the underlying need. And I think the adoption into private networks is something to watch weather industries and how fast industries adopt this new technology to cut the cable if you want. I think those are a few things that will drive volatility. Then I think another thing can also be the newcomers on the market when there is a 3rd report or a 5th operator that may choose to leapfrog some of the previous technology to, for example, go all cloud, all cloud native from day 1. That will also drive technology adoption and perhaps faster deployment of some of the new technologies, including 5 gs standalone. Call. Okay, great. Thank you so much, Jan. Thank you, Victor. Thank you. The next question comes from the line of Jesper Thanks and good morning. Regarding your virtualization platform. You say that the corona pandemic is causing market lag, but that your technology will prevail over supplier specific systems over time. Could you give us a little bit more color on your expectations here And how you see the market evolving? Like should we interpret this as operators still sticking to their old solutions? Thank you, Jesper. No, I mean there are several market analysts, in particular of the market for SD WAN, software defined wide area networks, projecting year over year growth of double digit growth during a number of years to come. I think it's quite natural that the pandemic has put a bit of a lag on that particular market. I mean, it's all about connectivity, connecting offices, perhaps connecting branches, stores, etcetera. And I think we all know that with work from home and lower activity on physical, for example, shops that might not have been the same priority as it were. But having said that, we believe that that market will come back, the SD WAN market. And what I wrote about in the interim report is that we believe that the market and the kind of technology based on open deployment, free hardware choice and multiple choices of applications will prevail over the vendor specific solutions, both because of the flexibility and also the cost efficiency of that particular solution. So that's where we play and that's where we see some of the early adopters of the market entering. Great. Thank you very much. Thank you. The next question comes from the line of Simon Granath from ABG. Please go ahead. Your line is open. Good morning, Jan and Jan. Thanks for the presentation, and I hope that all is well with you guys. Initially, could you elaborate some more on how the 5 gs contracts Cloud contracts are developing. You said that you are in delivery mode. So this means that they contributed to Q1 financials. And Do you see risk for delays in delivery of these contracts due to the pandemic? Yes, I mean, we closed a number of important contracts during last year and they are long term contracts and they contribute to revenues over a number of years. And we are in delivery mode of that. The kind of revenue recognition or a bit different for the different contracts depending on the criteria, for example, milestone criteria or subscriber uptake criteria, etcetera. But we continue to deliver and area, etcetera. But we continue to deliver and we do not really see that the pandemic as such as an impact on the delivery of those contracts. We have been able to change the operation of our company into work from home, remote delivery, etcetera, and the same with our customers. So we move on with those contracts as initially planned in all the essentials. Okay. Thank you. Also, did the Actillo develop in line with your expectations in Q1? I know that Sales came down from Q4, but I presume that is due to seasonality or am I missing something else? Yes, Aptilo has a very high portion of recurring revenue and a stable customer base, in particular for delivering public Wi Fi systems and now also with the growth opportunity in IoT Systems. And there are like in EMEA's traditional business variations between quarters. So we continue to see a stable outlook for the Aptivo business. Perfect. Thank you. And then final question. What is your plan on OpEx in OpEx increases that have. Do you anticipate OpEx to grow in 2021? Or will this be more so towards the latter part of the year in order to have slightly higher, for instance, workforce as the project delays situation probably fails. Case. I can touch on that, Jan. Yes, please. I mean, we We see a decrease overall in OpEx compared to last year due to the efficiency programs we implemented last year, but we are still investing in our growth initiatives. So we are investing a bit more going forward in France, but at the same time, we are de investing in product groups which are reducing sales like, for instance, in operating systems. So I would expect overall a big increase, but at around same numbers and maybe a little bit more. Meeting. Thank you so much. All for me. Thank you. The next question comes from the line of Frank Moore from DNB. Please go ahead. Your line is open. Yes. Another question for me, please. With regards to your M and A ambitions, could you give us some thoughts, please, on potential direction of strategic direction that you would be aiming at in terms of potential bolt on areas within your to complete your current product portfolio within 5 gs core, for instance, or applications. Coming year. You move now into Wi Fi with the latest Wi Fi core basically IoT connectivity potentially with the Aptila acquisition. On the other hand, your 5 gs Micro core offering for the private market. It's still very much a highly multi vendor one where you provide the data management part of the core. I mean, would you be potential would you potentially be looking to band into other parts of the 5 gs core with future acquisitions or yes, if you could give us some idea as to what directions you are exploring, that would be helpful. Thank you. Yes. Thank you, Frank. Yes, I mean, if you look at the acquisitions that EMEA has done, we've done 1 acquisition per year about during the last 4 years. There's been a few themes. One theme is the 5 gs and telecommunications and in particular, data management. In this segment and also Aptihel, in fact, contributed to that because although it's public Wi Fi and IoT, it's still in the area Quantum Policy Control. So it fits nicely and complements the offering that we had. The other key theme is on cybersecurity, where we already have some position in traffic intelligence, but where we see a continued interest and growth in cybersecurity, also in the intersection cybersecurity and telecommunication systems. So I think the kind of acquisition that we have done during recent year, which is more of a sort of established business with an established customer base as well as a technology leading position. Those are the kind of acquisitions that we have found interesting and also we've been able to successfully integrate into EMEA. So going forward then, I think it's reasonable to say that we would be looking at similar kind of acquisitions. When and if they would occur, We would be looking into telecommunications and cybersecurity, enriching our offering. It could be in the area of 5 gs and 5 gs core. As you say, it could also be in the area of security or securing these solutions. And it would probably be an area where we have the opportunity to get an established business and to grow and complement our installed base of customers also to also create sort of synergies and cross selling opportunities. That's how we've been thinking in the past and it's still very much our acquisition strategy for strategic acquisitions going forward. Okay. Thank you. Thank you. As we have no further questions, I will pass back for any closing comments. Thank you, operator. I'd just like to thank everyone for joining this call. And we look forward to your continued interest in EMEA. Thank you very much.