U.S. Markets close in 3 hrs 3 mins

Edited Transcript of MSAB B.ST earnings conference call or presentation 19-Jul-19 7:00am GMT

Q2 2019 Micro Systemation AB (publ) Earnings Call

Jul 22, 2019 (Thomson StreetEvents) -- Edited Transcript of Micro Systemation AB (publ) earnings conference call or presentation Friday, July 19, 2019 at 7:00:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Joel Bollo

Micro Systemation AB - President & CEO

* Henrik Bergentoft

Micro Systemation AB - CFO

================================================================================

Conference Call Participants

================================================================================

* Victor Harbach

Danske Bank - Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Today I'm pleased to present the CEO Joel Bollo. Please begin.

--------------------------------------------------------------------------------

Joel Bollo, Micro Systemation AB - President & CEO [2]

--------------------------------------------------------------------------------

Hi and welcome to the first half year financial presentation. We who are presenting today is myself Joel Bollo; I am the CEO. And with me I have my colleague Mr. Henrik Bergentoft who is the CFO of MSAB.

Next slide please. MSAB is the leader in mobile forensics industry and was founded in 1984 in Sweden. Today we are a public listed company, a leading trusted partner to law enforcement, military and intelligence agencies in over 100 countries. We are 100% focused on mobile forensics and we have pioneered the mobile forensic industry. We started with our mobile forensic products already in 2003.

We have been the mobile forensic industry -- longest of all the mobile forensic companies active today. Our mission is to help the police solve more crimes and create a safer world by providing state-of-the-art mobile forensic solution and services. As of today we have our own staff in 17 different countries being able to serve and support our customers close to their locations.

Next slide. So now each of the figures for the first half year of 2019. Sales revenue for the first half year became SEK130 million. This is actually the highest six-month figure the Company ever had. That said, I am not pleased with it and I would like to see more sales. Our EBIT amounted to minus SEK12.1 million, which is a direct consequence of our investments we've done for future growth.

Let's have a look on what the sales consists of. Next slide please. Here we have two diagrams which shows the sales for the first half year 2019. On the left-hand side we have the split of new sales and licensed new sales. We can see that our new sales did not reach up to the same level as last year.

If we dive into why, let's move over to the right-hand diagram where we can see that it is mainly one pro category that did not reach up to last year's sales. That is the [fee] version. The fee version is mainly sold to our defense customers and those orders come more seldom but are normally larger.

All the other new sales are on par or growing compared to last year. We can see how we did more frontline, more training and keep up good with the sales of office version of XRY. The license renewal is increasing and increasing so much that the revenue in total becomes larger than last year. That said, I am not pleased with the new sales for the first half year.

We can and shall do more. The market for our business is there. We know that our current customers need to invest more as well as there are tens of thousands of customers that still have not invested at all in mobile forensic solutions. The license renewal shows the strength in our business model and also that our customers are so pleased with our solutions that they continue to renew their licenses year over year.

Next slide please. We have a good spread of our sales. All regions performed close or about where we were last year. Markets that continued to show strength is North American and EMEA. We continue to win new businesses both in North America and EMEA. We know that we can do more and, with the investments we have done globally, we expect the regions to increase sales even faster. Next slide please.

--------------------------------------------------------------------------------

Henrik Bergentoft, Micro Systemation AB - CFO [3]

--------------------------------------------------------------------------------

Now some more details on the financials. Joel already commented on the development of sales so I will move on to the next slide, which is cost of goods sold. The gross margin for the first half year is 92% as compared to 88% previous year. For the rolling 12 months we have it at 89% as compared to 87% for the full year 2018.

The improved gross margin is a function of a couple of orders last year containing more hardware than the usual average. A rule of thumb is that on or about 90% gross margin is what we expect, but may vary between quarters typically with sales of the Field Version solution. Other external cost increases for the quarter and the six months.

The main variable cost in this category is external marketing where we are doing increased efforts to promote our brand and products where the second quarter in particular has been an intense period with several tradeshows.

When it comes to external costs I want to highlight the implication of the introduction of IFRS 16, which means that lease contracts longer than 12 months will be recognized as an asset in the balance sheet and depreciated over the length of the contract.

For MSAB this has mainly meant that cost for office spaces now will appear in the income statement as a cost of depreciation, previously part of external costs. MSAB is still a very asset light business in what traditionally is categorized as assets.

The personnel cost is a direct function of the number of headcount where the average for the six months is 182 compared to 148 last year, an increase of 23%, which more or less directly applies to the increase in personnel costs. The increased headcount is mainly in two categories, development and sales and marketing, hence investments in our organization to stimulate and maximize future growth.

Cost of revenue combined we see a negative operating result for both the quarter and the first half year. This is a direct consequence of MSAB building an organization for growth over the lead time for generating new sales, as previously commented on by Joel, takes somewhat longer than expected.

The MSA business model has a high cash conversion, meaning that over time operating cash flow varies with the operating profit. For the first six months cash flow from operations is negative at SEK6 million compared to a negative operating result of SEK70 million SEK. The difference is that we have positive effects from working capital mainly with less outstanding receivables.

Next slide. These two graphs show sales, operating profit and margin over a longer period of time. To the left we see it by quarter. The main takeaway here is that sales fluctuate quite significantly between the quarters, but the second half of the year historically always has been stronger.

The main reason for this is that customers, to a large degree, place their orders at the end of their budget year, which for Europe mainly is in December and in the US in September. Since MSAB has a very scalable business model, sales in a certain period will significantly impact the profit in that period.

To the right we see sales and profit in full years. In 2017, the Company made a record leap in sales and profit as a direct consequence of the strong sales. The Company is now investing in the organization to enable the next level in sales. As in many cases investment comes first and the return later, temporarily putting the Company at profit margins lower than historically and not representative of what the business is capable of generating in the longer term.

Learning a bit from history we can see that MSAB's sales have not only fluctuated over the quarters but also over the years. For example, MSAB had very strong sales in 2015 with a slowdown in 2016 to really take off again in 2017. Hence we really emphasize the view of the MSAB business in the longer-term perspective. Next slide.

--------------------------------------------------------------------------------

Joel Bollo, Micro Systemation AB - President & CEO [4]

--------------------------------------------------------------------------------

What we offer to our customers is a total solution. The total solution is the MSAB ecosystem of mobile forensic. The total solution will mean that we can help our customers of securing evidence from crime scene to court, not only fast and efficient but also with no [barging] or chain of custody.

Next slide please. XRY can be packaged in a station based version. That is our kiosk solution. The kiosk is a very fast, secure and easy way of extracting information from confiscated cell phones. The kiosk is a top-of-the-line offer in performance and ease-of-use for non-skilled users to be able to secure important evidence.

If needed, we do also offer other platforms for more mobile users, same performance and ease-of-use as the kiosk on a tailor-made tablet that enables the police to be more flexible and mobile. A way to secure the evidence whenever and wherever they wish, but with no barging or chain of custody. The number of [floor plan] users are few today compared to the potential and demand that is out there.

Next slide please, our top-of-the-line solution is the forensic lab version of XRY. For the forensic lab we offer a fully-fledged product suite that can do almost anything to any type of cell phone. The forensic labs were the early adopters of XRY Office. You see stable and increasing new sales of XRY Office even if the market potential is not as fast growing as we see for the front line and others.

Next slide please. What is increasingly important is the possibility to secure and make sense of information faster than ever. In [medicine] they call it the critical hour. In the forensic industry it is called the critical 48 hours. The science that shows that if the police had not secured any evidence within the first 48 hours chances of solving that crime decreases by 50% or more. The most important source for finding evidence fast is the cell phone.

Next slide please. Once the police have been able to extract information from one or several devices the police need to find what they are looking for. It is not as easy as it could look. There can be hundreds of thousands of pictures and millions of chats, etc. To find what the police are looking for they need top-of-the-line software that can help them find the critical evidence.

With the XAMN family of products a user can do more faster than with any other tool as we know on the market. XAMN cannot only carve out deleted and hidden data, the data is also presented in a [category] manner. More powerful and simpler forensics tool is hard to find.

Next slide please. The most powerful version of XAMN is XAMN Horizon. With artificial intelligence built into XAMN Horizon combined with a logical smart fuse police can faster than ever view what they are looking for in minutes. The XAMN Horizon can present the data that the police is looking for in many different views.

On the slide we see for examples of how to present data. On the top we see the collection view. By comparing information from several different phones the police get a smart overview of how the suspects or suspect have been communicating, who is related to who and who is the most frequent caller at what time, etc.

To the right we see a timeline view. In this view the police can see frequency of actions and if there are patterns of the day, weeks, etc. The view can be zoomed in to look at what happens in seconds or months or even years.

At the bottom we see the conversation view. With the conversation view the police can see chat conversations from one or combined from several chat apps at the same time. This is extra powerful as suspects tried to hide information by using [different] chat apps during one conversation.

To the left we see the map view. With the map view the police can plot all geo-located information on a map. The map view gives a great oversight of where all the actions have taken place. The police can easily see patterns of where suspects have been during specific times and actions. Next slide please.

--------------------------------------------------------------------------------

Henrik Bergentoft, Micro Systemation AB - CFO [5]

--------------------------------------------------------------------------------

On the graph on the right-hand side you can see the gray bars showing our revenue from license renewals over the years, which the trend line shows is over time ever increasing. This is a consequence of the fact that most of our customers renew their license. This also means that with every new sale we do in a year adds another potential license renewal revenue the following year.

The line shows the proportion of renewal revenue related to total product sales, as shown on or about 50% of the revenue is recurring. The core of the MSAB business consists of selling a license to use our software. The license is usually sold for one year but could be up to three years. When the license expires customers will in most cases renew their license generating a recurring revenue.

And as long as a customer has a valid license they receive support. But most importantly, the right to download all of the upgrades that we constantly do to our product. These updates are a reflection of the constant flow of new phones and new and updated app. Hence, the possibility to update and always have the latest capabilities is a great driver to customers renewing our license.

A scalable business model with a constant increase of recurring revenue is a great foundation for the Company. This gives us the comfort to have a long-term perspective on our business when making investments in our organization to stimulate and maximize growth potential. Next slide.

--------------------------------------------------------------------------------

Joel Bollo, Micro Systemation AB - President & CEO [6]

--------------------------------------------------------------------------------

Last but not least, MSAB are here to make a safer world. Our heroes are all our customers that work so hard to make the world a safer place. If we treat our customers as the heroes they deserve to be treated as, and we develop the products that make their life easier, they will continue to invest in MSAB solutions and we will grow and make good money for our owners. Thank you for listening.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions). [Victor Harbach], [Danske] Bank.

--------------------------------------------------------------------------------

Victor Harbach, Danske Bank - Analyst [2]

--------------------------------------------------------------------------------

Could you talk a bit about the development in the different regions? I would prefer if you could talk a bit on a country basis. Maybe mention something of the US, France, the UK, India and Japan -- Australia as well.

--------------------------------------------------------------------------------

Joel Bollo, Micro Systemation AB - President & CEO [3]

--------------------------------------------------------------------------------

It's hard to comment on each country when we don't represent it that way. But we can say in North American in general we think it's a quarter -- or the first two quarters is a little bit slower. And our larger customer group in the US is the federal government and federal government has a budget year end in September.

That said, there is a lot of development in businesses going on in federal -- in additional federal agencies since there is a continuously increased demand I would say for different types of mobile forensics solutions.

If we move over to UK, which is maybe one of the most developed countries for our type of products, we have and still have the largest installed base of frontline solutions except not only in the forensic labs. We have for the frontline solutions also very big demand in there.

So the growth potential we see in the UK, which is -- so maybe we can say the third phase -- is to go even further into the analytics and investigators now going to sort out and find all the evidence -- not only find, also do it in a fast and efficient way as I showed in my presentation regarding XAMN family, which we believe has some very strong potential. We've seen increased demand for it -- interest for it and we expect to see more sales faster in XAMN in the future.

If we look on another territory where we had slight decreased sales -- new sales this year compared to last year, which we also commented in the report, is Australia. That is thanks to -- they haven't done any -- I mean, haven't done the kind of investments at all I would say as they did last year. We suppose its new investment is not linear over the years for every region. Anymore questions on that one?

--------------------------------------------------------------------------------

Victor Harbach, Danske Bank - Analyst [4]

--------------------------------------------------------------------------------

Japan and India as well. I might have lost you --.

--------------------------------------------------------------------------------

Joel Bollo, Micro Systemation AB - President & CEO [5]

--------------------------------------------------------------------------------

Oh yes, absolutely. Yes, India, as you know we started up India -- I mean, we didn't start. We have been working with India for many years. India has been a -- for the East I would say -- I shouldn't say complicated, but maybe complex is the right word, complex market.

So we decided to hire our own staff in India and we have, without going into exact figures, but even if it's from lower level we've had a record year in India so far, but it's not to the level where we see the potential of the business. But we see the direct impact by putting our own staff in India has been very positive for us.

Japan we also have had -- have an [entry]. It's a good -- Japan is a little bit slower than India, but we see a large potential in Japan. We know for sure that they use one of our main competitor's products very much in Japan. Hence I would say the main owner is in India and -- but the demand for our tools is -- and interest for this is very high.

--------------------------------------------------------------------------------

Victor Harbach, Danske Bank - Analyst [6]

--------------------------------------------------------------------------------

Okay. And in Q1 you said that you had some orders pushed on the wrong side of the quarter from Q1 into Q2. Was that the case and what was the magnitude of those orders?

--------------------------------------------------------------------------------

Joel Bollo, Micro Systemation AB - President & CEO [7]

--------------------------------------------------------------------------------

Yes, some of those orders have come in Q2, yes. But as I also said, we continue this report in two ways. While -- in ways that we are -- and I am very clear, I think we should have done more. But that said, there have been some comments to me that, Joel, you also have to have some expectations that it (inaudible).

Even if it is small margin, it's -- we've never done more in the first six months than this EBIT before. And we know Q1 and Q2 is more volatile than Q3 and Q4 since that's when the big-budget year-end (inaudible) is coming for a larger market.

--------------------------------------------------------------------------------

Victor Harbach, Danske Bank - Analyst [8]

--------------------------------------------------------------------------------

And have you seen anything change there for the potential of clients ordering more in Q3 and Q4? Especially September?

--------------------------------------------------------------------------------

Joel Bollo, Micro Systemation AB - President & CEO [9]

--------------------------------------------------------------------------------

No, no, we haven't seen any -- I mean, what do you mean? In a pattern that I don't (multiple speakers).

--------------------------------------------------------------------------------

Victor Harbach, Danske Bank - Analyst [10]

--------------------------------------------------------------------------------

Exactly -- if client discussions, if anything has changed in the potential of getting new orders.

--------------------------------------------------------------------------------

Joel Bollo, Micro Systemation AB - President & CEO [11]

--------------------------------------------------------------------------------

No, no, I wouldn't say that.

--------------------------------------------------------------------------------

Victor Harbach, Danske Bank - Analyst [12]

--------------------------------------------------------------------------------

Okay. And can you talk a bit more -- in the report you say you're going to do some process and organizational changes to enable growth and higher profitability? Could you delve into details in that, what exactly are you planning to do?

--------------------------------------------------------------------------------

Joel Bollo, Micro Systemation AB - President & CEO [13]

--------------------------------------------------------------------------------

I cannot say exactly details because everything is not (inaudible) internally. I say I'm going to do it in this coming quarter, so I cannot go into the detail. But in general I can say that we see that we have developed -- just take one example. We have developed the XAMN family to be so strong now that we really see that we can push and challenge other types of companies that normally we haven't been able to do and get (inaudible) investigators area.

And even though we have done a little bit in the past, now we are at a level where we can do much more here. And that requires different types of both marketing and sales. And we maybe will reallocate some resources from something -- actually reallocate or -- and add resources (inaudible) that market for example.

But also in development where we see things are changing, where -- just to give you an example, we have a development department that has been focused on apps or phones, but now we're going to reorganize it more into, okay, what level of complex technology, get into the phone or get into and app can be exactly the same thing.

So yes, it's going to impact several departments within the Company. But only in a positive way so that we can do things even faster. Now when we have staffed up we have the capacity of doing that. If we haven't been able to staff up, which we have done in the past year, we would not have been able to do this.

--------------------------------------------------------------------------------

Victor Harbach, Danske Bank - Analyst [14]

--------------------------------------------------------------------------------

Okay, and do you see yourself as fully staffed up by now with headcount increasing 20%-plus a couple quarters in a row now?

--------------------------------------------------------------------------------

Joel Bollo, Micro Systemation AB - President & CEO [15]

--------------------------------------------------------------------------------

I don't think we are fully staffed. That said, we are not going to -- we are not going to do the investment in a faster phase than we see that we can catch up also with the sales, if that's the question.

--------------------------------------------------------------------------------

Victor Harbach, Danske Bank - Analyst [16]

--------------------------------------------------------------------------------

Okay. And just so I get it right with these process and organizational changes. Is it to be interpreted as cost savings or cost increases short-term?

--------------------------------------------------------------------------------

Joel Bollo, Micro Systemation AB - President & CEO [17]

--------------------------------------------------------------------------------

Neither way; I mean this is not like a cost-saving program. This is just more efficient, I would say, and [adopt] to the reality. That's what I would say. So, it's not a cost-saving program or --. And we're going to continue to invest, but the investments we do of course follow with the sales as well.

--------------------------------------------------------------------------------

Victor Harbach, Danske Bank - Analyst [18]

--------------------------------------------------------------------------------

Okay. And for the other external costs, I might've missed it, but did you say that they were more than normal, more than usual spending on trade fairs in Q2?

--------------------------------------------------------------------------------

Henrik Bergentoft, Micro Systemation AB - CFO [19]

--------------------------------------------------------------------------------

Yes, I could comment. Yes, marketing (inaudible) were more internal in Q2 than Q1 for example. That is correctly understood by you.

--------------------------------------------------------------------------------

Victor Harbach, Danske Bank - Analyst [20]

--------------------------------------------------------------------------------

And what is the schedule for Q3 and Q4 then in terms of marketing activities at trade fairs?

--------------------------------------------------------------------------------

Henrik Bergentoft, Micro Systemation AB - CFO [21]

--------------------------------------------------------------------------------

It's on this level but not high I would say. If anything it might be lower in certain quarters. So, I would say that this is the level that you would expect going forward.

--------------------------------------------------------------------------------

Victor Harbach, Danske Bank - Analyst [22]

--------------------------------------------------------------------------------

For the cost line or for marketing?

--------------------------------------------------------------------------------

Henrik Bergentoft, Micro Systemation AB - CFO [23]

--------------------------------------------------------------------------------

Well, for marketing and then obviously you have other things going in there. But I think that -- I mean, this range of external costs plus or minus a couple million between the quarters, I would say that that is more or less the range that we see going forward in the short term at least.

--------------------------------------------------------------------------------

Victor Harbach, Danske Bank - Analyst [24]

--------------------------------------------------------------------------------

Okay. And a question on competition. You say that some competitors have become more aggressive I guess in marketing and [essentially] pricing. Does that [sound right]? And what do you see on the competitor side? If you could give some color on a specific market like EMEA, Western Europe and North America, that would be great as well.

--------------------------------------------------------------------------------

Joel Bollo, Micro Systemation AB - President & CEO [25]

--------------------------------------------------------------------------------

Well, I think competition is -- can't talk a lot about competition. But in general we'd say not more aggressive. I mean, competition has slightly -- and I've been clear on that one for a long time now, that competition is there. This is a maturing market or a mature market in some cases, depending on which area of the market we're talking about.

And we see that -- what I comment in my report specifically on is that we see that we are very strong on the frontline business. And I would claim there we probably have the largest installed base for frontline solutions that we see some really high reduced prices in some quotes. And that shows maybe that they want to try to buy into where we have our strength.

But at the same time, we are the one that really now start to challenge competition on the investigative side with the great development being done on the XAMN type of family, which is a huge potential. So, it's not -- on the competitive market we challenge ourselves on -- from both angles I would say. You challenge others and you're getting challenged by others.

--------------------------------------------------------------------------------

Victor Harbach, Danske Bank - Analyst [26]

--------------------------------------------------------------------------------

Okay. That's it for me now. Thank you.

--------------------------------------------------------------------------------

Operator [27]

--------------------------------------------------------------------------------

(Operator Instructions). As there no further questions I will hand back to the speakers.

--------------------------------------------------------------------------------

Joel Bollo, Micro Systemation AB - President & CEO [28]

--------------------------------------------------------------------------------

Okay, thank you so much. And if you want to have even deeper answers on our reports, feel free to contact us on email or call us later. Else from that, thank you for attending and listening. Do you want to comment, Henrik?

--------------------------------------------------------------------------------

Henrik Bergentoft, Micro Systemation AB - CFO [29]

--------------------------------------------------------------------------------

No, I agree with that.

--------------------------------------------------------------------------------

Operator [30]

--------------------------------------------------------------------------------

This now concludes our conference call. Thank you all for attending.