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Edited Transcript of EDGEW.ST earnings conference call or presentation 17-Jul-20 9:30am GMT

Q2 2020 Edgeware AB (publ) Earnings Call

STOCKHOLM Jul 17, 2020 (Thomson StreetEvents) -- Edited Transcript of Edgeware AB (publ) earnings conference call or presentation Friday, July 17, 2020 at 9:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Annika Norin

Edgeware AB (publ) - CFO and Head of HR & IR

* Karl Thedéen

Edgeware AB (publ) - CEO

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Conference Call Participants

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* Daniel Djurberg

Handelsbanken Capital Markets AB, Research Division - Research Analyst

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Presentation

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Operator [1]

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Hello, everyone, and welcome to the Edgeware Q2 Report 2020. Today, I am pleased to present Karl Thedéen, CEO; and Annika Norin, CFO. (Operator Instructions)

I will now hand you over to call to Karl Thedéen. Please begin.

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

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Thank you, and welcome to our Q2 results presentation. So we can skip over to Slide #4 about Edgeware. I guess most of you listening know about the company. Still continue to highlight the strong and large customer base we have with some prominent names like Telia, Telenor, KPN, Proximus and others. And obviously, also now looking for new customers and sign new customers in this quarter.

With that, I can go to Slide #5, please. So our financial figures. I'm happy to report that we are growing this quarter. I have to admit that we do that from a low quarter of -- quarter 2 of last year. But still very happy to see that we are basically grown 25% and almost that compared to the first quarter of this year. We come to that later, but that's despite the impact we see from the corona pandemic ongoing.

Gross margins were in the range where we have indicated, between 65% and 75%, subject to volumes. So this is well in line with that. And product margins remained very strong, including services margin. Operating profit, as Annika will come back to, it's impacted by some one-off effects.

If we then look on the first half year, we're almost in line on revenue compared to last year, and we are actually -- have reduced our losses as we have been carefully managing our cost and continue to invest in new products and market developments.

So with that, I go to next slide, Slide #6, please. So we start looking at the market. It's fair to say that the COVID-19 has affected the market we operate in. Most effective is Asia Pac, where there still is ongoing off and on closing down of main markets, including Hong Kong and China for us. But it's also affecting our main markets in EMEA where customers are more cautious and budgets are restricted.

Obviously, live sports is coming back, to some extent. But still, some of the big events that was due to happen this year, including a Euro Cup in football and the Olympics, are obviously canceled. But they are coming back, and we are seeing some positive sign from Southern Europe on that.

It's -- we continue to have very strong growth in our recurring software and support business. And that's very encouraging as that is the strong foundation for our journey to become -- to have a stronger recurring base. Most positive this quarter is our success with our new products that we have invested in for quite a few quarters now and we have done several things in this quarter.

We launched with a press release and a new name and the new content of previously called origin product called now StreamBuilder. It's the product where we prepare the video stream for Internet online distribution. We have the specific feature around virtual channel creation, sub targeting out things included in StreamBuilder, differentiating us from some of our competitors.

We also launched our new cloud-based elastic CDN, and it's basically how you can run our CDN software in the cloud, and you use exactly how much processing capacity that you need from one time to another, scaling up and down with the different peaks that is happening in your customer base.

Further, I have also proof points from customers. First, StreamBuilder, which is now integrated with a managed services provider. This is a company that we unfortunately can't name, but it's an American company that is providing full-scale integrated solution and helping content owners to distribute that to consumers. And they have, with our -- with the basis of our solutions, signed initially 1 large OTT content provider.

With StreamPilots, we started that project basically 18 months back. And now we have signed our first contract, and that is with Norway's largest commercial TV channel, TV 2 and their OTT offering called Sumo. This is a fantastic proof point for the team and for the innovation that we started and launched at the big industry fair, IBC, in September of last year, and now we're signing our first customer. We have other customers in the pipe as well.

And then thirdly, but not least, we have order for this large-scale commercial trial for our cloud-based elastic CDN, which I'll come to a bit later as well. So strong support for our products in this quarter.

We continue to have efficient operations. We have kept R&D and actually a slight increase compared to last years to make sure that we can meet the key deliveries in terms of signing new customers on our new products. At the same time, we have reduced our selling and admin expenses down 22%. And we continued in this quarter to implement further cost cutting and manage our cost carefully.

With that, I'll go to Slide #7. And we can jump directly to Slide #8. I have stated this, just reiterating. COVID-19 is impacting our business with cautiousness from our customers, some investment budgets being reduced and obviously, live sports not happening. We obviously have dialogues, and as you can see, our revenues going up in the quarter. But the impact is there, and it's very difficult for us to understand how it will continue to impact. But the only thing we know it's going to continue to impact some of the activities in our market even going forward.

With that, I go to Slide #10, StreamPilot. That StreamPilot is our way to control third-party CDNs, and many customers are having expensive and valuable content. They want a way to distribute that over multiple CDNs to handle peak traffic, but also give redundancy.

And with that in mind, we started a dialogue with TV 2 Sumo less than a year back. And they have now, after trialing it during the first half year of this year, signed a contract and running this now in live production for their OTT traffic. This is the first service that we have which basically is initial CDN selection. But there are quite a few other services that we have planned for this SaaS product, and that will also be evaluated by TV 2.

TV 2 is, as I said, Norway's largest commercial TV channel, commercial free-to-air, owned by the media group Egmont, and it's -- they have a growing OTT service. So we really look forward to continue to work with them. We also are testing with other players in Nordic countries, but also elsewhere in the world. And we hope to announce more contracts throughout this year on our StreamPilot product.

This is also the first time we, as a company, are now serving and doing a SaaS-managed service, which means that our team are managing the service for, in this case, TV 2 in using an AWS cloud platform.

We go to Slide #11. StreamBuilder, which is the name for preparing in-video streams for Internet distribution, and we have a couple of different functionalities in that: packaging for different devices; storing so you can have a catch-up TV, of course; but then also being able to create regional channels, we can insert regional ads, and we can obviously do multi-device subtitling.

As I've said, we are integrated with a large managed services partner. We do believe that the best way of selling this is to work in that kind of way because this product typically generates a lot of systems integration, which can be handled by large customers. But an integrated way that we now have is, we believe, a very good way to reach better market penetration.

And as I said, we have some unique things in this, which has been one of the reasons they actually choose to work with us to reach out to their end customers. So happy with the progress on StreamBuilder.

We can then go to the CDN part. So the CDN is an offering that we've had obviously for many years in our company. We started with the CDN using our own hardware for deployments far out in the networks. We then have developed a CDN software that can be deployed on any type of commercial off-the-shelf type hardware.

The trend now is also to start using public clouds or private cloud environments, which is a cost-effective way if you only want to use the CDN for peak traffic, for example. And this requires some specific things in the software, which we have developed and trialed with this large-scale and cable OTT provider. So that gives us a good proof point, and this is actually something that we have already received incoming request from other customers that they think this is an interesting way to handle specifically the OTT CDN.

We do think that we are pretty early out on this. And we will continue to penetrate this market, which is a combination of this and our existing CDNs, which will be the ultimate solution. This also fits very well to be combined with StreamPilot.

Go to Slide #13, or I -- actually with this, I can hand over to Annika and take us through the financials.

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Annika Norin, Edgeware AB (publ) - CFO and Head of HR & IR [3]

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Thank you, Karl. Now please turn to Page 14, Edgeware in numbers. Looking at Q2, we ended up with a net sales of SEK 38.6 million, which is an increase year-over-year with 25%, though coming from low quarter revenue last year of SEK 30.8 million. The increase in local currencies were 29.7% where the negative impact coming from Mexican pesos going down during the quarter.

Looking at the revenue in regions. EMEA grow with almost 39% year-over-year, giving our revenue of the quarter with SEK 19.7 million. As communicated before, in the Western Europe, we have a very mature market where subscriber growth is low and the CDN and capacity is well developed. This give less need of investment. This was very visible last year Q2 '19.

On the other hand, our customers are not leaving us. They are still investing, and this we see in this quarter where they have now done midsized orders, product orders, many of our customers.

In America, we saw a good growth of 74% year-over-year. Here, as we have communicated before, we have a high customer concentration. So this major customer we have in the region is giving up and down between the regions -- between the quarters, sorry. This quarter, we had a good investment from this customer. Last year in Q1, we had a real good investment from that same major customers. So looking at the full first half of the year, Americas were a little slightly down.

Looking at APAC. The net sales declined year-over-year with almost 43%. Also this quarter, we get affected on the corona lockdown in the region. So both Q1 and Q2, the product investments in the region were very low. So in Q2, the main part of the revenue was coming from support contracts on running support contracts.

Looking at the first half of the year. We had a revenue of SEK 80 million, which is almost in line with last year's SEK 83.9 million.

Please turn to next page, Page 15. Looking at the sales divided by sales categories and gross margins. The net sales for products grew year-over-year with 47%. As said before, the increase is coming from EMEA and Americas region and a decrease in APAC region.

On services side, instead, where both professional services and support revenue is included, we saw an increase year-over-year with 8%. The support part grew with 10% year-over-year. And looking at the support revenue for the first half of the year, it grew with 15% year-over-year. This is also the base for our recurring revenue. And looking at the recurring revenue for the first half of the year was growing with 15% year-over-year.

Looking at the gross margin. It ended up at 67.8%, which is a normal level at this revenue level. Underlying product margin is on a high stable level. And also the service margin is actually on a high -- all-time high level, coming both from growing of the support revenue, part and -- but also a reduction on the service COGS.

Then please turn to next page, Page 16. Our OpEx for the quarter ended up at SEK 38 million compared to SEK 39 million last year. In this SEK 38 million, we have an impact of SEK 4.8 million coming from one-off costs. SEK 2.5 million is coming from negative effect of exchange rate differences, and SEK 2.3 million is coming from restructuring costs coming from streamlining of the organization.

If we reduce these one-offs, the OpEx between the years actually reduced around 10%. The OpEx is SEK 33 million without these negative one-off effects.

Looking at the EBIT. We ended up at almost negatively SEK 12 million. Taking into account again these one-off costs, the EBIT level was negatively SEK 7.1 million. On the -- we closed the quarter with around 86 persons in -- employee compared to 100 last year. So reduction between the years is coming mainly from fewer employees and consultants.

Also the restructuring we did now in Q2, going forward, this will have around a 10% yearly impact on the OpEx. To keep in mind also on the OpEx side, we had some reduction in cost coming from the corona since we are not traveling. And also we have canceled fares that were not able to be participated in.

Turn to next page, 17, please. The balance sheet and cash flow. Looking at the total assets, we ended the quarter with SEK 263 million and the capitalized expenditure of 9%, around SEK 24 million. The capitalized R&D were 16% of total development expenses both for the quarter and for the first half of the year. And looking at the net impact of R&D, both capitalized and depreciation, the net effect was, for the quarter and also for the first half, SEK 0.2 million. So very close to negative effect -- sorry, very close to a 0 effect on the EBIT.

Our cash closing the quarter was SEK 153 million. We have no loans or interest-bearing debt. And the cash flow for the period, we had SEK 76.1 million in positive. But SEK 75 million of those were coming from selling the short-term investments we've had, so we now have it in the bank accounts instead. So taking away the SEK 75 million, the positive cash flow for the period was SEK 1.1 million. And looking for the first half of the year, the same amount of positive cash flow was SEK 11.9 million, excluding the SEK 75 million we had sold in short-term investments. And I think that -- and also the equity ratio for the quarter -- for closing the quarter was 73.5%.

And that leaves what I was supposed to present. And back to Karl, please.

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

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Thank you very much, Annika, and we can then move to Slide 19, please. So summarizing a quarter that we are reasonably proud of. We have top line growth in our home market EMEA and in Americas and that is investments to cater for subscriber and traffic growth despite the ongoing pandemic. But even more important is that we have reached key milestones on our road to build software company and a company much more based on new products and recurring revenue.

We signed our first contract for StreamPilot and this is record time. It's basically 18 months after we came up with innovation and less than a year after we launched it as a major trade fair in Amsterdam on September 2019. So very strong work by the team, and I feel confident that we have something that is a key differentiator in the marketplace.

We have integrated out StreamBuilder product into a major managed service product, giving us a new way to reach new customers. And we have already -- they have already signed a very large international OTT provider to deploy their services using our software components.

We have also improved innovation and capabilities on our CDN, and our CDN can now operate also in private and public clouds. And very importantly, we continue to grow our recurring support business, supporting our customers with a very strong team and having a very, very strong margin on that service.

Unfortunately, the corona pandemic is ongoing in the world, and it still impacts both business in APAC. But also in EMEA, we have seen budget restrictions and cautiousness among our investors. We continue, therefore, to do efficiency measures and we have done so in Q2. And we can see that already also in our results where we continue to have strong cash flow and a very strong cash position, which is supporting the implementation of our strategy to invest in our products to reach new markets and build a new business.

We also continue to see the low sales volumes and bumpiness from our large customers that traditionally have invested in infrastructure for CDNs. And we are with them talking about some CDN business, of course, but also all the new products that we're having. But we continue to see top line fluctuations between the quarters as we build our new business much more based on recurring revenue.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of Daniel Djurberg from Handelsbanken.

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Daniel Djurberg, Handelsbanken Capital Markets AB, Research Division - Research Analyst [2]

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Good work in the quarter, I think. I would like to ask a couple of questions, if I may, starting with -- you mentioned the support revenue grew 10% and this lies within services. I think, Annika, that you also said -- gave the proportion or the portion of support revenues within the services revenues, but I missed to take note, if you could just repeat that.

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Annika Norin, Edgeware AB (publ) - CFO and Head of HR & IR [3]

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Yes. Actually, the professional services part actually declined year-over-year with 3%. And you also have -- if you look the portion of support revenue for the quarter was SEK 15.9 million and the service -- professional services part, also SEK 2.8 million.

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Daniel Djurberg, Handelsbanken Capital Markets AB, Research Division - Research Analyst [4]

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Perfect. Okay. And then, obviously, interesting with this StreamBuilder being integrated with this major managed service provider here with one large OTT provider as you mentioned. I was wondering, if you look at the strength that you saw in Americas in the quarter, although weak comparisons, what would you say it -- mainly from all the customers' activities, so is this also an impact from new products such as StreamBuilder collaboration here?

Can you comment more a little bit on that revenue model, et cetera, and so on, with this major managed service provider would be great.

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Karl Thedéen, Edgeware AB (publ) - CEO [5]

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Okay. So that model is going to be an OpEx recurring model, and it is not material in this quarter. And it's obviously -- it's a partner that can reach quite a few customers, of course. And it will take some time before that becomes material for our -- in our business, but it's all recurring.

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Daniel Djurberg, Handelsbanken Capital Markets AB, Research Division - Research Analyst [6]

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Perfect. And if you can comment on the strengths in the Americas and the interest capacity or what's behind this?

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Karl Thedéen, Edgeware AB (publ) - CEO [7]

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Yes. I think what we commented on before, Europe has been basically IPTV and TV Everywhere where OTT CDNs built up for telcos has been stabilized because there is limited subscriber growth.

Whilst in sort of the developing world or countries like Brazil, Mexico, China, Hong Kong and so on, there's still growth in that online TV experience where people are moving away from traditional cable, linear TV, for example, to move online.

So this is based on some more catch up, increased quality on video and more viewing basically.

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Daniel Djurberg, Handelsbanken Capital Markets AB, Research Division - Research Analyst [8]

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Okay. And then a question, if I may, on the capacity needs. And obviously, that was very weak in -- when we had no sport events. But since, I guess, a month back, most arenas has opened without any audience, but still the audience moves to the -- hopefully looking at the -- all these matches at home instead of perhaps IPTV or the set-top boxes. And so the question is really, have you seen any capacity hike at the part of the quarter, i.e., second half of June, more or less, due to this huge interest, at least, for sports at home?

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Karl Thedéen, Edgeware AB (publ) - CEO [9]

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Well it -- definitely, that is -- it is a huge interest, but we also need to see which of our customers have the sports trials to drive that into their networks.

And I would say that in Southern Europe, we have those kind of customers. Whilst in the Nordics, our big customers here are not that highly -- heavily invested in sports at this moment in time. This is obviously changing from year-on-year. But at the moment, it's more Southern Europe that is driving down. We see the difference. That's more interesting. That has more push on our networks in those areas than it used to be a quarter back, so that's good. But I would say that's the main impact to date.

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Daniel Djurberg, Handelsbanken Capital Markets AB, Research Division - Research Analyst [10]

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Perfect. And as a follow-up to the last one here. You talked about midsized orders within your current customer base. And is this mainly capacity sales? Or is it more of densification, adding more boxes in the network as such, those midsized (inaudible)?

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Karl Thedéen, Edgeware AB (publ) - CEO [11]

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It's a combination of license orders, memory expansions, more servers to cater for traffic. A lot of our customers are also combining IPTV CDNs with OTT or HTTP space CDNs. So they need some updates for that. So it's traditional work on the CDNs, I would say.

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Operator [12]

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(Operator Instructions) And we have a follow-up from Daniel Djurberg from Handelsbanken.

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Daniel Djurberg, Handelsbanken Capital Markets AB, Research Division - Research Analyst [13]

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Yes. I also had another question, if I may, and that would be on the current -- how you do conduct business or how you build pipeline actually for StreamBuilder, StreamPilot, et cetera, given no trade fairs and how much of a hurdle is this or headwind on trying to build pipeline for second half in 2021?

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Karl Thedéen, Edgeware AB (publ) - CEO [14]

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Well, I think we have seen, obviously, and we have adopted a more centralized sales management, specifically for StreamPilot. It's a SaaS product. We are working very much with the contacts that we have from H2 and obviously support also by our sales teams worldwide.

And to some extent, we're also here reaching out to new type of customers because we're talking a lot to broadcasters and content owners. So I think that works pretty well. Obviously, it's sometimes more difficult to convince customers over a Teams call than in a physical meeting.

StreamBuilder will be the same. We'll keep trying to support this new service provider that we work with. And then obviously, that product can also be sold to a larger extent into existing customers. But I think in general, physical meetings is a bit of a problem because Team's calls you can take, and then you don't know exactly what happens after them.

So I think -- which I write also in the report is that building momentum for new solutions and so on, it's more tricky. I think StreamPilot is very unique. So that's likely easier to get traction with because -- and it's also very much in demand now with multi-CDN control.

So I think they're easier to build, at least, interest in that product at the moment than with some of our other products based on the situation.

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Operator [15]

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Thank you. And as there are no further questions registered at the moment, I will hand it back to the speakers. Please go ahead.

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Karl Thedéen, Edgeware AB (publ) - CEO [16]

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Okay. Thank you very much for listening. Have a nice summer, and we'll be back in October 23 with our Q3 report. Thank you very much.

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Operator [17]

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This concludes today's call. Thank you all for attending. You may now disconnect your lines.