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Edited Transcript of ENEA.ST earnings conference call or presentation 18-Jul-19 6:30am GMT

Q2 2019 Enea AB Earnings Call

Kista Jul 23, 2019 (Thomson StreetEvents) -- Edited Transcript of Enea AB earnings conference call or presentation Thursday, July 18, 2019 at 6:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Björn Westberg

Enea AB (publ) - CFO

* Jan Häglund

Enea AB (publ) - President & CEO

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Conference Call Participants

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* Viktor Westman

Redeye AB, Research Division - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the Enea AB Q2 Reports 2019. (Operator Instructions)

I'm now pleased to present CEO, Jan Häglund. Please begin.

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Jan Häglund, Enea AB (publ) - President & CEO [2]

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Thank you very much. This is Jan Häglund, President and CEO of Enea. I'm sitting here with Björn Westberg, also CFO of Enea. This is my first quarterly presentation as CEO of Enea.

Next slide, please. We will, in this conference, be doing an introduction. I will summarize the financial results and also give a highlight of the key events that have happened since the last quarterly report. Björn Westberg will give more financial details, and I will be wrapping up with a summary of our strategy and the outlook going forward.

Next slide, please. So we are now on Slide 3, the summary of financial results. So I'm really pleased to announce a quarter of strong growth and profitability. The revenue for Enea in the second quarter of 2019 came in at SEK 260.2 million for the quarter. That is a 22% increase corresponding to the same quarter last year and it is, in fact, the highest revenue ever in Enea's history. The operating margin came in at 27.8% corresponding then to an operating profit of SEK 72 million. Also, this is the highest operating profit ever in a quarter for the company.

Given that we also had a strong first quarter of the year, the total period, January to June, comes in strong at a revenue of SEK 501.1 million and an operating margin of 27.5%. So it can be noted then that this growth both in revenue and profitability had a large contribution from our newly acquired business in Policy and Access Control. This business is developing very well, in fact, ahead of our expectations. However, it should also be noted that other parts of our business are also contributing to the growth in revenue and profitability.

We did have a few onetime events in the quarter, in particular an R&D grant for our research and development that was -- that amounted to SEK 6 million and we also had a positive effect on cost due to a historic settlement that has been done, which also had a onetime effect in the quarter of about SEK 5 million that gave a positive contribution to our profit. Nevertheless, we are pleased about the strong quarter going forward.

We take the next slide. I'd like to summarize some of the key events that have happened since the last quarterly report. We have announced a sizable contract in the area of Deep Packet Inspection. Deep Packet Inspection technology where Enea is the market leader. This contract amounted to USD 2.8 million with the U.S.-based market leader in Software Defined Wide Area Networks. And you can say that this consolidates Enea's position as #1 in the Deep Packet Inspection market and also gives us an entry into the high-growth market of SD-WAN.

Another event since the last quarterly report is a frame agreement with one of our key customers in the area of operating systems. This frame agreement is over 4 years, will generate a total of EUR 21.2 million of revenue. As you know, those of you who have been following Enea, the market of operating systems is changing to more and more of open source, which has a negative impact on proprietary real-time operating systems where Enea is the market leader with our product overseas. Therefore, this contract has a declining revenue pattern. However, since this gives us a predictable revenue over 4 years, I'm quite happy to say that it removes uncertainty in this area, which is a good thing for us, and lets us plan ahead both for focus and cost.

We had, during the quarter, also signed our first contract for a new product, a product called NFV Access which targets the market for universal customer premise equipment used in particularly enterprise networking. This is a new market entry for Enea and also proves our track record of innovation. This product comes out of organic innovation in the company.

And talking about innovation, we have also announced innovation awards in particular for 2 new products, one called RAN Congestion Manager handling overload protection in mobile networks; and another one called the Stratum Cloud Data Manager, which is a solution positioned in particular for data handling 5G networks. We're very happy about this recognition of our innovation in the company.

So moving to next slide. Many of you have probably been following Enea since several years, but it's still worth highlighting what Enea is and what it will continue to be. In summary, you can say that Enea is a world-leading supplier of innovative software components for telecommunications and cybersecurity. What this means is that our business is entirely based on software. We operate globally. We invest in innovation. And our strategy is to target growing segments of telecom and cybersecurity in particular.

If we go to next slide, it can be a bit more specific. This slide attempts to show the market that we are addressing and the solutions that we have. It shows that we are targeting enterprise networks, we are targeting access networks and we are targeting core networks both of mobile networks as well as enterprise networks. There are a number of areas where Enea is already the #1 in the market. In particular, we're #1 for embedded Deep Packet Inspection. We are #1 for operating systems for radio access networks, and we're also #1 on the market for video traffic management. In addition, we have newer solutions where we are working with Tier 1 operator. Two examples of this is cloud data management and also Policy and Access Control, a business that we came in with the latest acquisition that we did earlier this year.

And finally, I'd like to mention then that we also have new products. I mentioned the NFV Access product before, which gives us market entry into the market of virtualization platform, in particular for enterprise premises. So all in all, our strategy is to be leading in what we do and to be selective in the markets that we address and, in particular, select high-growth software markets.

On the next slide, we tried to summarize some of the numbers on those high-growth software market. One example is the software market for threat analysis and protection where analysts predict that this will grow by an annual 28% on average. Another example is the market that I mentioned before, the virtual Customer Premise Equipment software, which is predicted to grow with 51%.

Network Function Virtualization is a big trend in telecommunication and predictions are that by 2022, 80% of the business will be for Network Function Virtualization, increasing the importance of software and decreasing the importance of hardware where Enea is not playing as a company.

5G infrastructure is also predicted to grow rapidly during coming years by some 118%, obviously from a low level.

And finally, we don't have any financial numbers for the mobile video traffic growth. I don't think anyone is analyzing that. But just the sheer traffic growth by a predicted 54% a year says something about the need for investment and solutions to optimize that kind of market and that kind of traffic where Enea is a market leader as mentioned before.

So next slide. I think this slide summarizes and says very clearly that Enea is a very different company than it used to be a few years ago. Our dominating business is now clearly Network Solutions, which stands for 64% of our revenue in the second quarter. This is -- this segment consists of software that we sell both directly to telecom operators like Vodafone and AT&T, but it also contains software that we provide as part of solutions that larger system providers present to customers, for example, Nokia.

Our second largest business segment is Operating System Solutions. It used to be the largest a few years ago. Now it accounts for 21% of our revenue in the quarter. Here, Enea provides embedded software solutions to large companies like for example, Ericsson, Nokia and Fujitsu. Operating systems remains an important part of what we do. But as clearly seen here, it's a smaller part of our overall revenue.

Finally, Enea continues business in Global Services where we primarily do software and test development for a number of companies in different industry sector. We regard Global Services as a good complement to our product business in the company.

I think with that, we can move to the next slide, and I'll give the word to Björn Westberg and let Björn give us more details on the financial results for the second quarter.

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Björn Westberg, Enea AB (publ) - CFO [3]

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Thank you, Jan. So we continue to Slide 10. Slide 10 shows revenue for the most recent 5 quarters. Revenue grew by 22% in the quarter and amounted to SEK 260 million, which is the highest revenue ever for Enea in a quarter. The increase is mainly driven by new software licenses in the Network Solutions product group. Our recently acquired Policy and Access Control business, which was acquired 1st of March, is now in the numbers for a full quarter. Excluding that business, the organic growth was 6% as the increase in Network Solutions offset the decline in Operating System Solutions. I will come back to this later in the presentation.

Looking at -- on the record operating profit, Slide 11. We did achieve the highest operating profit in a quarter, mainly driven by the increase in revenue. The operating margin was close to 28%, which is also due to balanced development of costs. There was also a positive effect of more than SEK 5 million as a result of a final resolution dispute. Note that this does not relate to the previous dispute, which was finally settled early this year. Also, excluding this, the operating margin will be about 25%, still nearly higher than the second quarter last year.

We continue to next slide. Key Accounts now accounts for 26% compared to 46% 2 years back. This changed the [trend] by 2 things. One, the large increase of other software sales, which is recorded as Worldwide Software Sales; two, the sales is declining in operating system for our Key Account as the Key Accounts are using more and more open source solutions, partly replacing our operating systems. We have also Key Accounts sales from other product groups, which is the main driver for an overall increase in Key Accounts of 16% compared to last year. I will cover more of the Network and Operating System Solutions in the next slide.

So next, Slide 13. There are 2 apparent developments looking at the quarter, 2019 versus 2017, in line with the comment from the previous slide. Firstly, Network Solutions have increased sales very much. Secondly, Operating System Solutions is decreasing its share of the total. The Operating System Solutions declined by 17% in the quarter, but offset by the strong increase in Network Solutions, which now accounts for 64% of total revenues. In addition to this sector having a full quarter of the new Policy and Access Control business, we have won several contracts, with the largest in the quarter was within the DPI product solutions, which Jan presented before.

In Slide 14, we present the revenue per region. Asia, being the smallest market accounted 9% of the revenue in the quarter. This was less than the last year's second quarter as we had some large orders last year. This is an example of variations by quarter. We're seeing there's a large future potential to increase revenue in Asia with our wider offering.

The Policy and Access Control business has a larger part of these customers in the U.S. and EMEA, which was the main driver for the increases in both regions. Also, the large devalue order was in the U.S. region, as mentioned by Jan, USD 0.9 million was booked in the second quarter, which is one of many wins in the U.S. markets. Also, all our product groups have both driven presence and commercial focus in the U.S. market.

Slide 15, financial position. Our business generates steady cash flow as we normally have a strong operating cash flow in combination with balanced investment levels. For the second quarter, we had a strong operating cash flow before changes in the working capital. The working capital increased in the quarter balancing the reduction in the first quarter, generating a more normal change for the half year.

Net debt position is also well-balanced, generating a net debt-to-EBITDA of 1.6, including the remaining purchase price for the Policy and Access Control business of SEK 46 million paid end of November.

To summarize the financial position, the balance sheet and the key figures showed that we have a very solid financial position, which is improving even more in the coming quarters due to our operating cash flow generation. So we are very well positioned to invest and execute our group plan, which Jan will further explore in the next slide.

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Jan Häglund, Enea AB (publ) - President & CEO [4]

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Thank you very much, Björn. So I think we can move ahead now to the summary and outlook. We can move to Slide 17.

And so again I'm very pleased to present this second quarter results first as CEO for Enea. I've been around now meeting customers, meeting parts of the company, and I have a very optimistic view of how we perform so far as a company.

Looking ahead now into how we are positioned, we believe we are positioned for profitable growth. We have a market position where we operate, as mentioned before, on select markets in telecommunications both 4G and 5G as well as cybersecurity. We work with leading customers, and we are gaining top positions in key niche growing segments.

Our business model is a pure-play software model with high gross margin and a significant amount of recurring revenue. And we are not dependent on any hardware legacy, which is an important part, since software is growing in revenue share in our industry.

Our go-to market model gives us an extensive market reach both through our own sales force, but it's also complemented by working with multiple global partners. So we combine both the direct and indirect sales approach at a global scale.

Our growth strategy is both -- is based on innovation and leadership in key technology and product areas through own R&D investments, and we complement with strategic acquisitions.

We have a track record where I believe that we have proved that we can do both innovation through unique technology. We can execute on our strategy through expanding portfolio and business and a track record of financial development with more than -- with 20 quarters of growth in a row. In summary, you can say that we have proven that we deliver on promises.

Our financial position, as Björn mentioned, is solid with a robust balance sheet and attractive revenue mix, a significant earnings capacity and strong cash flows.

And the management team. The management team and the competency in the company is experienced, seasoned and a good mix of both global knowledge and knowledge and experience from different industries, deep technical market and customer understanding.

So wrapping things up on the final slide, Slide 18. Although our business is very different from a few years ago, we operate more in the Network Solutions area where we have new customers and also a different kind of revenue mix where variations will happen over quarters. We retain our objective for the full year of 2019 to achieve revenue growth over 2018 and an operating margin exceeding 20%.

With that, we are through our presentation, and I give it back to the moderator. Thank you very much for listening.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Viktor Westman of Redeye.

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Viktor Westman, Redeye AB, Research Division - Analyst [2]

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First question on the new deal in Key Accounts where you have a CAGR growth there of minus 21%. I was just curious how does the Key Accounts trend look like for Atos? Is it also a steep decline for Atos?

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Jan Häglund, Enea AB (publ) - President & CEO [3]

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Okay. Thank you, Viktor. So I think what Viktor is pointing out then is that with the acquisition that we did of the business in Policy and Access Control, we have also gained business with Key Accounts that we were operating with before. So that's why you see that although there is some decline in Key Accounts, we actually hold up that business quite well. We're happy about that, of course. I mean we have a solid position with the Key Accounts for this new Policy and Access Control business. And as I mentioned, we have actually so far been overachieving on our expectations for Policy and Access Control. I think that is what we can say so far about that. We're very happy with the development of this new acquisition.

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Viktor Westman, Redeye AB, Research Division - Analyst [4]

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Okay. I understand. Another question on the new NFV offering. Given that there are so many players who want to play in this space, what would you say are your unique selling points for your NFV offering?

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Jan Häglund, Enea AB (publ) - President & CEO [5]

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Yes. Thank you, Viktor. It's correct that NFV is a market with many players both for applications and for infrastructure. Enea has chosen to focus on what we call NFV for Access, so the extra small NFV platform for deployment far out in the network. Some people call it the edge or the far edge of the network. That is where we have strength, we believe, because we had experience not only from platforms but from realtime-sensitive platform with low footprint in embedded systems, and those are properties that will be needed here. So we believe that the fact that we've taken now a number of deals with our newly released product, the NFV Access, is a good first step in that direction.

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Viktor Westman, Redeye AB, Research Division - Analyst [6]

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Okay. Very good. And just a last follow-up on that NFV offering for the uCPE, do you have any estimates on how big the uCPE market can be for Enea in terms of addressable market?

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Jan Häglund, Enea AB (publ) - President & CEO [7]

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There are analysts that have analyzed the market of uCPE. I don't have a market number in my head right now, but we can for sure try to find out and provide you that information separately. But there are published numbers on the market outlook for universal CPEs.

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Operator [8]

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(Operator Instructions) Okay. There seem to be no further questions coming through, so I'll hand back to our speakers for the closing comments.

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Jan Häglund, Enea AB (publ) - President & CEO [9]

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Well, thank you very much. Well, again, thank you for listening. It was a pleasure to present the second quarter for 2019. Again, a strong quarter of strong revenue and strong profitability, and we really look forward to working with you going forward. And we thank you for the confidence also that you are giving in Enea. I'd like to thank Björn here, who has been assisting me in this call. So thank you very much and bye-bye.