U.S. Markets closed

Edited Transcript of NETI B.ST earnings conference call or presentation 29-Oct-19 8:30am GMT

Nine Months 2019 Net Insight AB Earnings Call

Stockholm Nov 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Net Insight AB earnings conference call or presentation Tuesday, October 29, 2019 at 8:30:00am GMT

TEXT version of Transcript

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

Corporate Participants

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

* Henrik Sund

Net Insight AB (publ) - Chief Executive Officer

* Pelle Bourn

Net Insight AB (publ) - CFO

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

Presentation

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

Operator [1]

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

Welcome to the Net Insight's AB Q3 Reports 2019. (Operator Instructions) Just to remind you, this conference call is being recorded. Today, I am pleased to present CEO, Henrik Sund; and CFO, Pelle Bourn. Please begin your meeting.

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

Henrik Sund, Net Insight AB (publ) - Chief Executive Officer [2]

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

Good morning and warmly welcome to our third quarter report for Net Insight. As said, Pelle Bourn is together with me, and I'm Henrik Sund, warmly welcome. And we are -- we have an agenda to proceed, and we will look into 2019 summary, and then a business update, a financial report and then we will conclude with a summary and Q&A.

And as I am sure you are well aware of, this is my last Q report with Net Insight. So this is my sixth one.

So as a summary, I want to move on and show you Q3 in a summary. And I am proud to say that the turnaround has continued. We can now show positive operating earnings, continue to show that, SEK 3 million, despite a bit lower revenue. And also good news is a positive cash flow of SEK 17 million. And I think these 2 are measures of a continued turnaround. Then we have also started to do segment reporting. I know that we have not been as transparent as we want to be, and now we are increasing that.

So we divide the reporting into our 3 business units: the Media Networks, our core Nimbra business; the Resource Optimization, the ScheduALL product and solution; and then the Streaming Solutions, Sye. So those are now being much more clearly communicated.

As a summary as well, we had a good and profitable media network business. We are running that business at approximately 20% operating margins. We had some important wins, specifically on the 1060, and we have communicated the Spanish broadcaster, RTVE.

And then of course, or maybe not of course but unfortunately, our Streaming Solutions still in a startup mode and Resource Optimization in a transformation mode. They delivered negative operating earnings. And this is topics we have covered before. But all in all, the turnaround continues, which I think is -- which makes me proud.

The business update then, if we look into that. As said, we have been looking into Resource Optimization and concluded that there is a need of significant resources to build Version 6. That continues according to plan. However, we also realize that, over time, the synergies between our core business, the Nimbra business, and the ScheduALL business is diminishing. So as we previously communicated, we have done strategic reviews, and one possible outcome is divestment of this part of the business.

For Streaming Solutions, Sye, the time line for increased efforts and the capital contribution has been somehow postponed. And this is due to strategic reasons, and we are reviewing when and how to make that happen. And that means that the capital contribution will not take place during the autumn, as previously communicated. This will then happen later on.

We also launched a new website, all about improving information and lead generation and all in line with improved clarity and showing what businesses we are in. My take on that is that this is showing significant improvements, and we also start with digital marketing around lead generation, which is also showing signs of significant progress. And after the Q3 closing, the Board has appointed Crister Fritzson as new CEO, and he will be joining first half and no later than April 14th.

So if we then dig into the respective business units. Media Networks, strong operating margin. Unfortunately, sales, somehow down 5% year-on-year change. Of course, we also need to realize that we've taken out quite a bit of overhead and marketing cost, and I know that Pelle will come back to that.

We see substantial growth potential in production, in IT and cloud-based transport solutions. So the driver will continue to be remote production, distributed production and then, over time, cloud-based production. We have a very strong partnership with Grass Valley, which we've had over years but now they have launched a tech alliance, which we are a significant contributor to. And as you recall, it was in close collaboration with Grass Valley, we did all the remote production with SVT. We have launched our Nimbra 400, and we see important customer wins for the Nimbra 1060, the IP-based solutions with -- for instance RTVE.

Looking at sales, somehow a bit lower, but rolling 12 months, it's similar. It's very -- it's at the same level. The operating earnings improving as well as the margins are also improving.

So all in all, I think the Media Networks is a very strong fundament for Net Insight going forward.

Streaming Solutions, the Sye. Of course, their start-up within the business, significant change year-on-year but still, of course, very, very low figures and negative operating earnings, still in a significant investment mode.

We have plans for the increased effort and they are still valid. However, a bit postponed. The Fortune 500 customer, they are in continuous testing and development for commercial launch. Good signs, good progress, but still a lot of testing to be done. Just to understand the importance of the Fortune 500, we are continuously working extremely close with them. And we had also some new deals like the Mediatech's CDN, Hong Kong Jockey Club solution, which is a mobile application for live betting and understanding the size of betting in Hong Kong. This is a significant win for Streaming Solutions.

Of course, we have some additional ones as well, but this is the major ones in this quarter.

Continuous focus on the Fortune 500, that's clearly where we're at in Streaming Solutions and continuous development.

Resource Optimization. Positive sales growth year-on-year. I think this is a sign of that we have revamped the focus on Resource Optimization. We've changed the management. Needless to say, the result is negative and a lot related to the modernization to make it cloud-based, mobile social availability on that product. And this is a long overdue rebuild of the Resource Optimization solution. So a clear continued focus on Version 6. As we've said, that we will be launched during Q1 next year.

And the modernization progress is well in plan, and we're getting very good customer feedback on our new solution. This was one of the main topic at IBC in Amsterdam, where we got significant and good client feedback.

We're also having significant amount of user groups right now to get our existing clients to understand what this will bring for the future.

We also realized that there is a large potential based on the feedback we're getting from existing as well as new clients. So we are in talks about deploying Version 5 to lately migrate to Version 6. But we also realize that there are significant resources needed, and we also understand that the synergies between our core business, Media Networks and ScheduALL are not materializing as they were when we did the original acquisition.

So as said, a strategic review about the future business as well as a divestment might be a possible outcome for Resource Optimization.

That was the summary of the business update. And by that, I give the words to you, Pelle, for the financial reporting.

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

Pelle Bourn, Net Insight AB (publ) - CFO [3]

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

Thank you, Henrik. So looking at the summary of the business areas. We do have a total sales in the quarter of SEK 112 million, which is somewhat lower than Q3 2018, minus 2%. We had a positive effect on currencies in the quarter, which means that in comparable currencies, we're actually at minus 7% versus Q3 in 2018.

On a rolling 12-month basis, we're at SEK 459 million, which is a couple of percent units up from the full year 2018 level.

So clearly, a challenge when it comes to the growth of the business. We are at the same level. But with reduced cost, we have a possibility that we can sustain this level, but it's not a regular level where we want to stay, obviously.

We do have some items affecting comparability. This, in our case, means terminations cost, the staff reductions related to the cost program we announced early this year. Program is, as such, finished. There has been some remaining, how should we say, remaining initiatives to look out. So excluding those, we're at SEK 4.3 million in operating earnings in the quarter, SEK 3.1 million with outcome, which is, of course, a change to last year where we were running in the reds.

And as Henrik said, we have a positive cash flow of SEK 17 million. We'll get back to that shortly.

As we say in the quarterly report, we are now -- not commenting anymore upon geographic regions. We are instead reporting sales and earnings by business area. We -- in the report, you will find also the breakdown in revenue type, hardware, software, support, et cetera, and geographic regions. But we're not commenting upon regions again because we believe that geographic regions has relatively little importance for understanding the business due to that it varies over time depending on the Nimbra business, which is event-driven and with large global customers who may purchase in one area and ship to another. So it doesn't really make a lot of sense.

But if you look at the net sales by segment and type, so we see that -- if we look at the 3 quarters here, January to September, the Media Networks and Nimbra businesses at SEK 290 million, a couple of million shy of last year's figures. This is -- there's a change in the mix between hardware and software. And that happens all the time, this change and this variation between hardware and software.

Basically, we sell the Nimbra as a solution, including both hardware and software. Since we do have a large existing customer base, from time to time, some customers who have software licenses buys extra hardware and the other way around, so that's why we have these fluctuations.

For Resource Optimization and ScheduALL business, we're at SEK 53.6 million, SEK 2 million over the same period last year.

The -- you see a decrease here in software licenses. This is nothing strange in the phase we're in. As previously said, we launched a new modern solution or presented it to the customers already in the beginning of Q -- in Q2 actually at the NAB, right. Thanks, Henrik.

And we're starting -- we have not really started any large rollout yet, but in a phase that is, of course, customers are waiting for new solutions, buying less software licenses on the older one.

However, we see interest in updating the old solution as we sell some more services and software on that. So customers gearing up, waiting for to migrate to the new solution once that's ready. So that shift is nothing dramatic.

The big change here is, of course, on Streaming Solutions, the Sye revenue, SEK 9 million versus SEK 2 million. And it's basically all in software licenses. And in relative, we should say that software licenses here means also SaaS, Software as a Service. So we have 2 different ways of delivering Sye as a solution, which is basically license-based or as a service, which is SaaS, Software as a Service.

So that's what we see here. Sorry, we can move on to the next.

Gross margin, 75%, somewhat higher than last year. And that's the gross margin excluding amortization of capitalized development, which itself has increased slightly. And the net gross margin, including capitalized development expenditure amortization, on par with Q3 in 2018. This margin varies, the gross margin varies as you can see between 50% and 60% net or between 70% and 75% excluding amortization, and it's a natural result of the revenue mix that we see, for instance, depending on hardware and software mix in the Nimbra business. So it fluctuates over time in this kind of range.

On the expenses, we were SEK 7 million lower in Q3, mainly due to lower number of staff as a result of the cost program we have touched earlier.

We do, however, see an increase in the development expenditure in Q3. This is mainly related to the increased efforts in the modernization of the ScheduALL, which is reaching a peak at this point.

But combined for the group, we will see continued R&D investments to secure the future business. We are in a highly competitive, very rapidly changing market and have been all the time. This is the kind of Net Insight environment that we operate in, so continued higher R&D investments, we will see.

So the operating earnings increased from minus SEK 4 million in Q3 '18 to plus SEK 3 million, main item coming from reduction of cost in sales and marketing. Part of that is seen as the negative figure, minus SEK 3 million in admin, when we did a new organization. We did some reclassification of staff that were previously in R&D or sales and marketing, and now in admin as management and heads of the various business areas.

But all in all, a cost reduction of about 10%, excluding foreign exchange differences and one-off, so a significant cost reduction, which explains the positive -- the shift to positive operating earnings.

Cash flow was positive SEK 17 million, mainly due to improvements in working capital, of course, having an operating earning in -- which is positive, also helps. But we do have a working capital, not a situation, but a working capital kind of seasonality, which is very high on accounts receivable. That has decreased in this quarter, in Q3, and took us to a positive cash flow. The investment activities is about on par with same quarter last year, and that's mainly related to development expenditures.

And as we announced in Q2, we have a liquidity reserve, which is a credit line. So it's not cash on bank. So we have SEK 67 million own cash and, on top of that, a credit of SEK 50 million running till year-end. The ambition is not to utilize it then. We have not utilized it during Q3.

That concludes the financial part, summary of the group finances, Henrik?

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

Henrik Sund, Net Insight AB (publ) - Chief Executive Officer [4]

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

Thank you, Pelle. And then we will move into the summary. And that as I said, is that we will -- we'll have continued the turnaround and that we are on a good journey forward. We have positive operating earnings despite the bit slower -- lower on revenue. Cash flow positive, SEK 17 million. We have improved the transparency and we have good profitability in our Media Networks, and we are continually -- continuously investing in Streaming Solutions and Resource Optimization.

And by that, I conclude the Q3 summary. And just before we move into Q&A, let me just share a personal reflection that this was my sixth quarterly communication. And I am proud leaving a much, much healthier company behind me now than it was 6 quarters ago. And I must just thank the people that are in Net Insight, they are great. Net Insight has very, very good and very loyal customers. And I believe in the journey forward, and I just wish my successor and the team best of success. And by that, thank you for listening and, of course, now we are into Q&A.

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

Questions and Answers

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

Operator [1]

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

(Operator Instructions)

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

Henrik Sund, Net Insight AB (publ) - Chief Executive Officer [2]

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

In the meantime, we can add -- we have received an e-mail question. Why we only mentioned, first of all, Henrik, customer in the presentation and not in report? Basically, it's because it's nothing new. It's the same communication as in Q2, basically. Customer is expecting the rollout to start -- we expect the customer to start rollout end of year. So there's no change in the view on that customer. So that's why it wasn't highlighted. So we see it as no new information, just a repeat of previous information regarding that customer.

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

Operator [3]

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

And currently, we have no questions coming from the phones. (Operator Instructions) Okay, there seems to be no questions from the phones at this point.

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

Henrik Sund, Net Insight AB (publ) - Chief Executive Officer [4]

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

Okay, then thank you very much for listening in. And have a continuously great day. Bye-bye.