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Edited Transcript of EDGEW.ST earnings conference call or presentation 19-Jul-19 8:00am GMT

Q2 2019 Edgeware AB (publ) Earnings Call

STOCKHOLM Jul 24, 2019 (Thomson StreetEvents) -- Edited Transcript of Edgeware AB (publ) earnings conference call or presentation Friday, July 19, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Annika Norin

Edgeware AB (publ) - CFO

* Karl Thedéen

Edgeware AB (publ) - CEO

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the Edgeware Q2 Teleconference 2019. Today, I am pleased to present Karl Thedéen, CEO; and CFO Annika Norin. (Operator Instructions) Speakers, please begin.

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Karl Thedéen, Edgeware AB (publ) - CEO [2]

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Okay. Good morning and welcome to this Q2 presentation. So let me take you through to Slide #4 about Edgeware. I guess most of you know who we are. Just to highlight again, we have a very strong set of clients, mainly in the telco space, but also in some broadcasters. We are some 100 people, and they're represented in 14 countries, and we have 200 customers in 70 countries altogether. So basically very strong foundation for continuing with our existing business, but also developed new products, and that can be launched into existing customers and new customers.

So with that take us to Slide #5. So obviously as we press released on June 3, this quarter is a big disappointment for the company. And as we then indicated or stated, this is due to the pretty sharp decline in sales volumes to our large Western European operators. We can see that for the quarter, we declined in sales of 38.4%; for the full year-to-date, it's 14.8%. Gross margin in the quarter was low, and that is just due to the impact of fixed cost that we allocate to gross margin. That gives a larger percentage of the cost as sales is very low. The product margins we are seeing were in line with other years. Operating profit on a very disappointing level of SEK 21.3 million for the quarter.

Next slide is #6. So let me take you through a little bit on the market, the products and all operations. So subtitling, we acquired the company Cavena Image in Q1 of this year. And we received in the quarter, one of the largest order that company have received ever with one existing large customer of Edgeware in LATAM. A very good proof point that this is very much in demand as broadcasters move from traditional linear broadcasting over to OTT platforms. So we continue to believe in the sales synergies of the Cavena solutions. We also received strategic CDN order from a Chinese cable operator in the quarter, very important as we move into areas where we see the demand of CDN being stronger than in Western Europe. And we also secured a new customer in Eastern Europe at the end of the quarter for combined IPTV and OTT CDN solutions. So the market is definitely not dead, and it's -- a lot of things happening, both on the CDN and the other markets.

So if we then go to what we're doing to position our new products. In the quarter, we launched the first version of Edgeware Cloud Service. This is a platform that we originally put the origin solution, which is taking in video content and prepare it for Internet distribution and also subtitling, that is the application we have on our cloud service platform. There will be more application as we move forward, as we continue to build the software platform to be offered to our customers.

We also attended BroadcastAsia, which is a very important show for our industry in Singapore in APAC, where we targeted most of our products, but specifically talked about our strong support for live and big sports events with deployment at scale, where we can handle, for example, large onboarding events where a lot of people want to log on to the system and -- just ahead of the football game, for example. And as we said in the June 3 release, there had not been any major sport events driving our business this year. We do think that 2020 will be different when we both have the European Cup in football and 2020 Olympics coming up in Tokyo. So that at least should drive the -- all our customers to review their installed base of capacity and so on, and hopefully, drive dialogues with ourselves.

In terms of operations, we continue to -- we're very cautious about our cost spend. We are, as we have stated before, in line to reach the more than 10% OpEx reductions compared to 2018. We are also launching some internal projects to accelerate the implementation of our strategy that we do believe is the right one, but we need to increase the pace of that implementation. And one thing that we have not been successful enough on is how fast we get our new products to market, to revenue and to credibility for selling into a volume base of other customers. And that's something where we're now reviewing how to do things and hope to come back to you in next quarter results in Q3 to describe how we're doing that more efficiently, as this is a very important way as we are now in a pace of launching a lot of new products all the time.

If we then go to the cloud offering, Slide #7. So it's basically take the OTT technology that we are offering to both telcos, but also to broadcasters. And we do believe that the broadcasting and content owners have less interest of building huge server farms and networks to support their OTT demand, and much more want to go to a software-as-a-service type model. And this is the reason we have it. We can still ship our software also in a recurring model as an on-prem, where they use their own service. But we think this capability is very important as we move into this new space of content owners and broadcasters. The main products we have is the origin, and you remember that some of the unique points is under the bullet point 3 here, the support for Ad Enabler or that support for dynamic ad insertion, our product called Virtual Channel Creation, where we can create regional channels, we can create theme-based channels after they have been produced to run over the Internet or enable for the Internet.

And then, not to say the least, subtitling, which we think is going to be very important, and by offering that in the cloud, it will be very easy for customers to utilize our unique OTT subtitling capabilities. But this is not the end of cloud service. We are in the way of creating a lot of new applications, that we can now load, and the trick is to get customers on to our cloud-based offering, and then we can launch more and more applications. And the sales of those will obviously be easier than if you start from scratch every time we go on with a new application. So a very important release that we are going to obviously continue to drive throughout this year and next year.

Just wanted to remind you a little bit on our strategy. As we are in this position, I think it's important for our investors to understand where we're heading and what we're doing. So we've put that on Slide #9. This is actually sort of copied a little bit from the press release that we issued at June 3. The company is investing in sales business, product development activities to support sales of CDN networks to telcos and cable operators in Asia, Latin America, Middle East and Eastern Europe. We're obviously still doing that in Europe, but this is just indicating that the pace of CDN deployments that we have experienced in Europe will come with more deployments of broadband connectivity to households. And we see that coming over the next 5 to 10 years also in other parts of the world. And by that, we focus on making sure that we have the right capabilities and right teams in place for those markets.

At the same time, there are obviously also going to be new type opportunities in Europe as more and more of the broadcast television goes away and goes over to an OTT environment. But the majority of the CDN efforts now is moving focus on new opportunities outside Western Europe. And we do see opportunity areas. We saw the Chinese cable operator was one such proof point.

The other point is we need to get into new products. We needed business development versus new type of customers. We have launched a lot of new products. We are working on some new, very innovative products that will be launched early September, so stay tuned on that where we are continuing to take our heritage from handling content, preparing it for distribution over the Internet, but doing that in a cloud environment to a large extent and with new type of products. That is very keen to us, and we have more than half of our R&D team work on these kind of new products now.

We're also having a pretty large cash pile still on the balance sheet. And we have said also from the IPO that we are pursuing an active M&A agenda. We started with our first with Cavena in Q1. And we are currently undertaking a review of the market to see and look and scan the market to be prepared to do conscious, well-considered acquisition to boost the portfolio, but also to get a faster traction with some new customer types.

And of course, in a situation where you lose money, you need to continue to focus on operational efficiency, which we are doing. I mean actually in the quarter now, we took some measures to reduce costs that also incurred a one-off restructuring cost that Annika will take you through later. So the strategy is that, drive CDN to new markets; invest heavily and continue to invest heavily in new product and business development; make sure that we pursue our M&A agenda; and focus on our cost side.

So we'll go to Slide #10. Also, I want to remind a little bit on the market we operate in, these are the market players. And as you can see, the main business that we have been driving to date is the business with telcos and cable operators. And we are increasing our efforts and our discussions and our business development discussion with content owners sitting on content, distributing that content either directly to end users via an OTT set up or, in many cases, also using the distribution capabilities from telcos and cable operators. This is the market we're in. It's a pretty complex market, but it's also very dynamic. A lot of changes happening in this market all the time.

By that -- and one important thing is, of course, that we have traditionally worked on people owning their networks, whilst we -- when we go to the content owners that are people that are don't traditionally own any network capabilities. So we -- that's the reason the cloud service becomes very important and also making sure that we have software that supports the control of the networks that these guys will use to distribute and -- their content to end users.

Slide #11, just highlighting where we have our business. Legacy CDN in Western Europe, which has been a very big part of our business. CDN to new markets, services and new products.

Let me now first start with Slide 12 to take you through what is driving our CDN business in -- with telcos. And it's basically subscriber growth, increased use of time shift, increased peak traffic, ad insertion or other advanced services, bandwidth or viewing quality and TV Everywhere that we can distribute this to more than the normal TV screen. And what you can see, what happened in Western Europe, that obviously the subscriber growth for these customers is very limited. It is actually not decreasing, but it's growing very slow. There is increased use of time shift, but that is also slow. We see some questions coming in from customers that they see big demand from this. This is when customers not viewing their 9:00 news at 9:00. Currently, this is around 20%, 25% of users using that. And you could argue that's a very low level in mature markets like Western Europe. As that moves ahead and increases, that drives demand in our IPTV networks.

Peak traffic is increasing, but it's obviously largely then driven by events and to some extent, driven by if the telcos are also investing in content, which we see some sign ourselves, like in our home market, if the Telia Bonnier Broadcasting deal goes through, that's one example of that. But we also see other markets where a lot of these sport events go through the telco networks, and that will drive demand.

Ad insertion, we have seen already demand for that. Viewing quality in 4K and almost 8K has been discussed, not a big deployment yet. But we do think that next year, we know that the broadcasters in Japan is driving this to even up to 8K. So we think there's going to be more and more demand for 4K and 8K distribution, and that drives up demand for our dealers as well in existing networks. And TV Everywhere is where operators wanted to deliver both to household TVs, but also for an app to drive it through smartphones and iPads and so on. This is done for us and additional software for HDTV software in addition to RTSP. So all in all, there are quite a few things that's driving this. And this is not the dead market in Western Europe, a lot of these things will happen over the years. So the investment will come back. To exactly what level is very difficult to judge at this time.

Go to Slide #13. Growth opportunity in the new CDN markets. And here we see some stats to the right-hand side. We can see that IPTV is still the fastest-growing of the 3 major pay TV platforms, the other ones being cable and satellite. And so still driving and increasing its market share. And specifically, in Asia, the growth is significant. So obviously, our opportunity in China is all very important for us.

We see this. We see a lot of new opportunities for CDN. Obviously, some of these markets are more problematic for us, in general, but we need to drive and focus on those more. Of course, that development that we saw in Western Europe over the last 10 years is happening now in other markets in the world.

Slide #14, sometimes we forget to talk about our services business. This is extremely strong to be a product company and more than 20% (inaudible) We have seen strong growth of this year-over-year this year and continue to focus and this is a very important part of our business. Obviously, this will then be enhanced as we move into a recurring software model as well going forward.

And then finally on where we are in new products. You can see there is quite a few new products that we have launched over the last 1 to 2 years. And I think one of the things that we're now reviewing is how can we faster get these products to generate significant revenue for us? We have not been successful enough there. I think when we actually reach and talk to customers, we'll get good confirmation that we have the right products, but we need to drive that faster. But I think we have a good set and that will be more launched -- new products launched also at IBC in mid-September. And so we have a basis to drive new business.

So with that, I will hand over to Annika to take us through the financials more in depth. Annika?

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Annika Norin, Edgeware AB (publ) - CFO [3]

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Okay. Thank you, Karl. Please turn to Page 17, Edgeware in numbers. The Q2 numbers, the net sales ended up, as Karl has said, at SEK 30.8 million, which is a decrease year-over-year with 38%, and the decrease is mainly coming from EMEA region where we historically have been having our largest revenue. The impact is large since in EMEA have been around 70% of Edgeware's sales historically. And looking at the Americas, we see, instead, a good increase of 70% year-over-year. In this number, we have the Cavena largest order -- one of Cavena's largest orders ever sold into one of Edgeware's customers in the LATAM regions. Looking at the Americas on the first half, we also see an increase of 78%. On APAC, on the other hand, we see a decrease in this quarter. They landed on SEK 8.5 million in revenue compared to SEK 9.6 million last year, which was the highest quarter in APAC last year. So looking at the first half of this year, we see an increase compared to the first half of last year with 13%. In Q2 numbers, we have a Cavena revenue of SEK 3.3 million.

Please turn to next page. Looking at net sales and gross margins, looking at the sales divided into the sales categories, as earlier stated, it's on the product side and mainly in EMEA, we see the decline. The decrease on product side is 63% year-over-year and mainly, as said, in EMEA, in Americas instead, we see an increase also on product side. Services, on the other hand, we saw an increase year-over-year with 30%, and the increase is coming both from support contracts and professional services revenue. And looking at the first half, we also see a good increase with 26% year-over-year. Looking at the gross margin, we see a low gross margin on 58.5%. The fixed cost we have in the COGS are impacting pretty much since the revenue is low, they get a higher impact percentage of the gross margin. Instead, we see a good improvement on the service margin due to both the higher service revenue and lower service COGS.

Please turn page. Looking at the EBIT and EBIT margin of Q2. The EBIT on the Q2 was a loss of SEK 21.3 million due to the low sales and the low gross margin. The EBIT margin ended up at a loss of 69%. On the other hand, we have a reduction on the OpEx side with SEK 8.2 million year-over-year, which is 17%. If we look at the reduction of costs, if taking away the extra costs we are having from Cavena, the decline year-over-year is 22%. In this OpEx number for this quarter, we have a restructuring cost of SEK 2.9 million. Last year, we had approximately the same, with SEK 3.3 million for restructuring costs. The OpEx reduction is mainly coming from fewer employees. We ended the quarter with 100 employees instead of 112 last year. And in this 100, we have 7 new employees coming from Cavena acquisition. And we are, of course, always, as Karl has mentioned, constantly overlooking and overviewing the cost side, not only on employee side, but on all type of costs.

Please turn the page to Page 20, looking at the balance sheet and the cash flow. We have still a good strong balance sheet with equity ratio of 73.2%. The total asset is at SEK 300 million approximately, and the capitalized R&D is SEK 24 million, which is 8% of the total assets. So we keep focusing on having lower [capitalized] expenditure, not to build up any R&D in the balance sheet. The net cash and current investments in the quarter ended -- at SEK 147.6 million. The cash flow in the quarter was negatively with SEK 26 million. But need to note that we was expecting a large payment -- customer payment in the quarter, that got in late, that we got in the first half of July, which was SEK 19.1 million. Looking at the cash flow for the total period this year, the first half was negatively SEK 20.7 million, but in that number, we also need to think that we have this extra SEK 9 million acquisition cost for Cavena. So totally a strong cash position, even though we had a bad Q2.

And that was all. And back to Karl.

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Karl Thedéen, Edgeware AB (publ) - CEO [4]

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Thank you, Annika. So back to Slide 22. So in summary, a very unfortunate development with our traditionally large customers in Western Europe, a large decline in sales that made this quarter into a very tough one. On the positive side, we have released new -- the Edgeware Cloud Service, a very important platform for our business going forward, driving a new SaaS business model. We also received some important strategic orders, the Chinese cable operator and also seeing the sales synergies of all subtitling products with our legacy Edgeware customer in LATAM. The continued efficiency measures in addition to the OpEx cuts done over the last 12 months, so basically we've, obviously, seen that -- the benefits of what we have done and continue to do so. We are not planning any major cuts in cost because we also do want to invest in the opportunities we have and in the product development that we are undertaking at the moment. So -- but we'll obviously continue reviewing and taking away things that can be made more efficient. The big focus for the company, as of now, is drive a faster way to market for new products, making sure that we develop the right opportunities on CDM in various markets, predominantly outside Western Europe. And there is a big event for this industry at IBC in Amsterdam, mid-September. We have some very interesting launches that we will be doing at that show, that we are expecting some good feedback from. So we do see that Q3 is going to be very important and interesting quarter for the company.

So with that, I thank you for listening and hand over to the operator.

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Operator [5]

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(Operator Instructions) And as there are no questions, I'll hand back to the speakers.

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Karl Thedéen, Edgeware AB (publ) - CEO [6]

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Okay. With that, thank you very much for listening. And we look forward to talk to you again on October 24th for our Q3 earnings report.

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Operator [7]

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This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.