Bittium Oyj (BITTI) Earnings Call Transcript & Summary

Okay. Good morning, everyone. Welcome to Bittium Corporation Half Year Financial Report 2021 Review Meeting. My name is Hannu Huttunen. I'm the company CEO. And with me here today, I have Mr. Pekka Kunnari, the company's CFO. So agenda for today's discussion is as shown here. So first, I will go through the main events during the first half of the year. And then Pekka will go through the numbers and then I'll get back and have a discussion about the outlook for the rest of the year. So if we start from the tactical communication product area or field of our business. This market area clearly has been the one that has been suffering the most from the COVID-19 pandemic in our business portfolio because this -- big system renewal projects that are required to build this new kind of data-driven performance for the battle management systems, they typically require a lot of physical presence. So there is all kind of piloting and integration work done together with the customer and different companies. And those initiatives or projects around the world have been pretty much frozen during the pandemic. However, we start to see the normalization of the market conditions. So we are optimistic that we will start to see more and more cases to reopen again in the near future. In the product offering side, we launched the new tactical management suite software product to the market. The software is meant for the commissioning and management of the SDR radios, and this is an important part of the overall performance and usefulness of this kind of modern data-driven solider radio system. And thus is an important part of the overall offering and increase our competitiveness further in there. In the domestic defense market, our good cooperation with the Finnish Defense Forces continued. We got the orders under the existing frame contract. So both from the TAC WIN system products and Comnode area, end user devices, voice over IP [indiscernible] devices as well as the system support for both of the product areas. Important milestone for us was that we were able to complete the basic development of the new Bittium Tough SDR radios. This has been a long going and very big investment for us as we have been discussing earlier. Of course, this is such a challenging product and technology area that there are very few companies in the world, generally speaking, that are capable of doing that and typically, these companies are much bigger than us. So for our size of the company, this has been a really big investment and a big effort from us, and we are happy that we were now able to complete the basic development phase. Naturally, these are software-defined radios as said there in the -- even in the product name, meaning that the capabilities of the products and performance of the products are constantly developed during the whole life cycle of the products and systems. So naturally, the product development will continue, but not in the same level than we have been doing during the basic development of the products. When it comes to the Finnish Army, the TAC WIN system that we have been delivering for several years already has been adapted to the operational use. And now with this new Tough SDR radios, you would see those as an extension for the TAC WIN system. So with the TAC WIN, we bring the VoIP and data capabilities for the battle management system all the way through the Comnode and the communication stations. But now with the SDR radios, we expand or extend this data capabilities to the single soldiers and single battle vehicles. And with those customers now acquiring for testing use and continue the wider field testing and planning how to take this product to the operational use. We expect that if everything goes normally with this testing and the planning, that we start to get additional orders for the products from the Finnish Army during the next year. In the national market, there, as discussed, the progress with the new cases have been quite slow, but we continued the deliveries for the current customers, most important ones being Austria and Estonia. So both products and software systems were delivered for [ all of the ] customers. We also delivered smaller systems to quite a few other international customers. And as I said, we are optimistic that they are in a way or another this pandemic starts to -- or impact of the pandemic starts to get over and we will see the reopening of several cases and are able to continue with those. Also, from the market point of view, the important milestone was that this a4ESSOR, which is a joint company of several European defense companies, Bittium being one of those, gotten acceptance for this ESSOR high-speed data rate waveform, meaning that now it can be taking in the operational use. And this is the waveform that's one of the -- or maybe the most important waveform in our new SDR products and the fact that market is now opening for ESSOR use is, of course, very important from the market generation point of view and hopefully opens new opportunities for us with new products. Then in the secure communication side. So as you may know, we have this Bittium Tough Mobile secure handsets as well as the -- as now the Secure Call communication application suite, you would say. So this is -- the official launch of this application package was done during the first half of the year. And what this package does is that it enables customers to do end-to-end encrypted secure voice communication, data communication, messaging, push-to-talk voice, video, et cetera. So all the basic communication needs that you have for your mobile system or mobile phone can be handled in the secure manner with this application package that we now have. So combined with this ultra secure Bittium Tough Mobile C handset, we can provide this kind of holistic secure solution for the end customers. Generally speaking, we saw good demand for this kind of secure communication products and systems during the first half of the year. Naturally, the general awareness of the threats or vulnerabilities for the mobile communication, they are getting more and more interest in the different areas and among the different customers. For example, this Pegasus malware discussion generated a lot of questions to us that they -- can we provide a system that's robust enough to be safe against such attack vectors in the -- from the secure point of view? From the approval point of view, we finally got the official confidential level approval for our holistic system, so this Bittium Tough Mobile C handset and the secure suite application suite from the Finnish authorities. We also got a restricted level approval from the Spanish authorities for our encryption software. And of course, these are important in that sense that now we have this official approval in Finland, which enables customers to start to use these products and systems in there from the legal point of view from the situation or in the situations that, that they are required to handle the confidential data or discuss about the classified topics. But also from the international market point of view, these are, of course, very important references for us, for the international customers that we have like a third-party independent authority that has been auditing our system and got an approval that they are -- given an approval that, that just miss really this kind of confidential level secure. When it comes to Mexsat satellite handsets. We have been doing this Mexsat business for several years already and have been trying to find ways to grow the volume. We have been selling these phones already for, I don't know, at least 3 years, but volumes have not been what we have been targeted. And naturally, this also means from the end customer organizations point of view. So security organizations in Mexico that the system has not been fully utilized so far. And we have been trying to identify the ways to support better from our point of view the system usage and a roll-out of the new users in [ turn ]. And what we did during the first half of the year, we agreed about this kind of exclusive distribution agreement with the Mexican company called Inmosat, and we are pretty confident that Inmosat is the right partner for this kind of purpose. They have a very good geographical presence in Mexico and good capabilities to support end customers both from the commercial and technical point of view. And this cooperation has been starting pretty well. So we already did the first deliveries during the first half of the year and are quite confident that this now opens the big volumes for our Mexsat business. Then in the medical technology side of the Bittium. What comes to market generally, I guess that you could say that this kind of first shock or freezing of the market caused by COVID-19 pandemic, I mean that the -- all kind of health care organization have been pretty much focusing to handle the challenges caused by the pandemic and other health issues or problems have not been there in the priority and have been a little bit left alone, you could say, for -- in some cases. And this situation despite the fact that the pandemic is still there and new variants are spreading, however, we have been seeing an increasing demand in the different areas of other health care, so especially this heart analysis that's our main business and the brain and sleep apnea. So clearly, market seems to be normalizing and we had a good half in -- when it comes to the sale of medical products, and we are seeing increasing demand in there. We think that it was important opening for us that we introduced this new sleep apnea testing device, Bittium Respiro during the first half of the year, because clearly, this is a new opening that increases our accessible market quite remarkably in here. Our own analysis is that sleep apnea -- I mean sleep apnea analysis in homes or outside of the sleep clinics or hospitals. The market size is about the same than this kind of remote heart activity diagnostics. So clearly, this is an important new opening for us [indiscernible] and we are confident that by bringing this very modern competitive remote usage driven product solution for that market, we can start to build the business as we -- similar kind of business that we have in the ECG testing at the moment. On the ECG side, we brought this Bittium OmegaSnap disposable electrode to the market, which is specially meant for the longtime or even 2 weeks measurement of the heart activity, and it's quite challenging to have such a -- such a sticker that sticks there in 2 weeks despite the fact that the customer is having shower and sports and whatever and we are very, very happy with the quality that we have been able to generate in here. And of course, this is this kind of an important item that in long run generates more and more recurring revenue for us. And more and more products are sold and it means that more and more [indiscernible] also will be need for these electrodes. We -- as said, we have had a good delivery volumes during the first half of the year. Still a major customer being Preventice in the U.S. and really they have driven the volumes for us. In the EEG side, we are happy that we were still -- we were able to have some new customers and some real openings for our new BrainStatus product. We launched this product to the market last year, but progress has been quite slow and the main reason for that has been that first application area was this incentive care unit analysis and incentive care departments have been pretty much focusing during the pandemic to the COVID-19 patients, and it has been very difficult to get access to those customers. But now we have several customers already. So a few customers in Europe, Finland, Germany, Austria and a few countries in Asia that we have been delivering the small system, but still anywhere we have now been able to open that part of the business also. And there in the back-end side, we have continued to develop our Bittium MedicalSuite cloud-based back-end system. And now this back-end system supports all the branches of our biosignals measurement. So same system runs the heart analysis, brain analysis as well as sleep apnea analysis and covers all the product logistics, doctor logistics, et cetera, and then also the analysis. So we have this cloud-based algorithms utilizing, for example, a machine learning in there to provide a good analysis, helping doctors to get faster and better diagnostics of the different problems. Then in the area of R&D services. I guess that the story is -- our view to the market is somewhat similar to the other markets that, also in there, we see that market slowly starts to get towards normal and demand is increasing. Naturally, there still has been challenges because of the COVID. There has been restrictions in traveling and customers have not been able to visit our technical teams and see the capabilities of laboratories, et cetera. And that has had an impact for our capabilities to attract new customers. But with the current customers, we have been able to grow our business, and business has been going quite stably. Despite of the COVID cases, we also have been able to get some new international important customers, and we are quite optimistic when it comes to near future that we could be -- we will be able to start the business to the -- or turn the business to the growth path. One interesting new technology or system area here in this R&D services side is this O-RAN, this open radio access network specification, which mobile operators are driving to have this kind of open standard for the radio networks both for the different elements of the radio networks as well as the interfaces between the different elements. And their main purpose is to attract new players to the market. So today, we have this few global big technology companies providing radio networks, but operators are thinking that they could have more competition in there by attracting new players that are not able to provide the whole network, but some part of the radio system and focus to those because of the standard interfaces and standard specifications. And if that will happen, it means that there will be new players in the radio network business. And most probably these new players will have such a -- will not have such a strong in-house competencies for the radio product development as naturally to speak big current system customers or players are having an -- you would imagine that those could be quite interesting new customers for us. We're having a really long and deep experience about radio networks. As said, our goal here is to further increase the number of product development service projects and continue to expand the customer base also. Okay. I will now hand over to Pekka.

Thank you, Hannu. Let's look at our numbers. Hannu talked about the background of business, but let's look for what it means as numbers for second quarter and first half of this year. First, net sales for second quarter. Total net sales was roughly EUR 23 million, and it decreased by 10% compared to last year's second quarter. And divided by product base, the net sales of the product based -- product business and service business roughly 70%, still at the same level as previously. So 70% of total net sales was product based and it was roughly EUR 17 million. And service base was the rest of that. So 30% -- roughly 30% and EUR 6 million. Looking at the product-based net sales, there was net sales for medical products of EUR 5.6 million, and it increased compared to last year, there was good growth. And as Hannu mentioned, there was good progress with cardiac products and mainly of those was delivered to U.S.A. And the Defense & Security products' stake was roughly EUR 11 million, and it decreased. In last year, it was EUR 50 million and it decreased. We provided or delivered products of Defense & Security side tactical communication products. There is a matter of timing of product deliveries between different quarters. That's one reason why it dropped compared to last year, but also we had some problems to get all electronic components what was needed to manufacture all of those products, which we are planning to deliver during Q2. And that's why some amount of product deliveries postponed from Q2 to second half of this year. Also, there was delivery of Mexsat satellite phones or terminals, roughly a bit more than EUR 2 million was the Mexsat products and then also there was good progress with Tough Mobile 2 products. Then net sales. In first half year, the total net sales was roughly EUR 40 million. It decreased roughly by 7% and product-based net sales was roughly EUR 28 million and roughly half of that gain from medical products and other part was the Defense & Security products. There we can see that development of those products medical side revenue -- total revenue for first half was roughly EUR 40 million. And last year, it was roughly EUR 10 million. So good growth there. And Defense & Security side total net sales was roughly EUR 15 million, and last year, roughly EUR 21 million, and that decreased and [indiscernible] same reasons as I said during -- or concerning to second quarter this year. Service-based net sales was EUR 12 million, and it declined slightly. We could say that it was quite at the same level as last year. So the demand for services remains stable anyhow. Operating result for first -- sorry, the second quarter was EUR 0.7 million positive operating profit, and it is representing roughly 3% of net sales. During the first quarter this year, we had operating loss of EUR 1.5 million. So together, this first half was negatives or red figures, minus EUR 0.7 million for this first half. Last year, the same period, we made operating profit, EUR 2.9 million. The reason why it declined between those periods is that, of course, our net sales was less this half as it was last year. So that margin, we hadn't and also -- also, we recognized more R&D costs to our profit and loss statement as it was 1 year ago. And there were also good -- it's actually a very good [indiscernible] with our R&D investments during the first half this year and total cost was EUR 11 million, and EUR 4.4 million of that we capitalized to balance sheet. Last year, we capitalized EUR 7.4 million. So EUR 3 million was less capitalized and that amount is impacting to our fixed cost level for first half, and that was 1 reason. One reason why our profitability was lower for first half this year as it was [indiscernible] the last year. The share of R&D investments to compare the net sales. It was roughly 28% and it was lower than last year. And the development there is good, it's lowering. But anyhow, we had strong investments to our products. As mentioned earlier, we have finalized the SDR product development. And that made impact to first half. But now when it's finalized, it doesn't make any additional capitalizations for second half. Then we developed tactical communication systems and they continue to develop tactical communication systems and also Tough Mobile related softwares and biosignal measuring and monitoring products was also developed. Cash flow for first half was minus EUR 5.8 million. Operating -- cash flow from operating activities was positive EUR 1.2 million. There, our net working capital increased roughly by EUR 4 million. We had good or big amount of product deliveries in June and those are in our account receivables at the end of June and that increased our net working capital. Cash flow, the investing activities minus EUR 5.2 million. And most part of that are our -- in the investments -- the R&D investments to balance these capitalized assets, EUR 4.4 million. And financing activities, minus EUR 1.8 million. And there is included payment -- dividend payment made in April this year. And also, there is the leasing costs or leasing debt payments. Assets and liabilities, balance sheet, total amount of balance sheet EUR 161 million. In asset side, noncurrent assets are roughly 54% and current 46%. Noncurrent assets was EUR 87 million, and most part of that are our capitalized development costs, roughly EUR 49 million. And current assets, EUR 74 million. There is -- our inventory is roughly EUR 20 million and trade and other receivables EUR 35 million. And cash balance the last day in June was roughly EUR 19 million. And another side of balance sheet, equity and liabilities. Our equity ratio is still strong, more than 71%. And liabilities are -- was EUR 49 million. And from those interest-bearing debt was roughly EUR 22 million. Net gearing bit more than 3%. So very, very good and strong situation there still. So I could say about this, the balance sheet is still strong, and there has not been any major movements during the first half. Okay. Those was our numbers for first half and second quarter and then Hannu will tell about the outlook for current year. Thank you.

Okay. So how does the rest of the year look? So in the beginning of the year, we gave a guidance that our net sales will grow from the previous year. When it was EUR 78.4 million and our operating profit result will be better than previous year EUR 2.1 million. We see that this guidance is still valid. So no change in the guidance. When you think about the risks that may have an impact for the rest of the year performance. From the sales point of view, our situation looks quite strong. So we have a really good sales pipeline. We have a good order base for the rest of the year. So we are pretty confident that we have good opportunity to achieve the targets from that point of view. The main challenge for this year has been the access for the semiconductors, the critical electronic components. It had a quite remarkable impact already for our first half of the year. So we could have delivered several millions more or sell several millions more during the first half if we would have had enough components. And it does not look like that this global disruption or challenge in the semiconductor market would get any easier during this year or maybe not even during the first half of next year. So most probably that will also have some kind of impact for our second half of the year. However, we currently believe that we will be able to get enough component to stay in the current guidance. That does not mean that we need to be 100% successful. Most probably, we will anyway have some deliveries moving to the next year regardless of the fact that we have orders because of the component situation, but still we believe we can stay in the guidance -- market guidance or give the market guidance. However, of course, it is possible because what we see today is that even confirmed component deliveries to us are canceled and moved ahead. So it's very difficult to say for sure that how the access to the electronic components will be during the second half of the year. And of course, if situation gets even worse from today's situation, it is possible that the targets will not be met. Anyway, how it looks today is that we have a good opportunity to achieve the current guidance. Okay. Thank you. I guess that now we have time for the questions, but there aren't any. So thank you for the interest about the Bittium and have a nice rest of the day. Thanks.