Bittium Oyj (BITTI) Earnings Call Transcript & Summary

Good morning, everyone. Welcome to Bittium Corporation First half '22 Review Meeting. My name is Hannu Huttunen, I'm the Bittium CEO; and with me here today, I have Mr. Pekka Kunnari, the company CFO. Contents for the meeting today as shown here. So first, I will go through the highlights for the Bittium from the second quarter of the year. Then Pekka will discuss about the numbers during the quarter and also the whole first half of '22. And then I'll get back to take a look about the outlook for the rest of the year and the whole year '22. So if we start from the defense side of Bittium business portfolio, so tactical communications -- generally speaking, the unfortunate Russia's invasion to Ukraine has led many, especially European, countries and governments to analyze and think about the capabilities, what comes to defending their countries. And as we have seen from quite a few countries too -- that have already decided that they will increase their budgets for the defense. For us, this will mean that this will enable also several countries to start their modernization programs for the tactical communication systems and devices. We have already seen quite a lot of request -- or information request from the customers, and we will participate to the several RFQ processes, for this year and the coming year for many countries. Another interesting or important point from our point of view, is the Finland's decision to join the NATO alliance. So if and when Finland will reach the full membership of NATO, this will open Finland and also Finnish companies access to the also to the parts of technology, namely cryptography, for example, that are available only for companies operating in the NATO countries. So we see that this will enforce our competitive position from -- in some of these coming RFQ processes, namely in the, of course, NATO countries and European NATO countries. So generally speaking, market is clearly speeding up here in the tactical communication side. This does not mean that they -- that these will be ordered immediately. But this means that this process is starting from the request for information, RFQs, pilots, trials and finally, the decisions to buy the production systems are now starting, and we will see these processes to realize as an orders from somebody, of course, we want to win as many as possible of those in the coming, let's say, 2 to 3 years. If you take a look about the first half of the year, second quarter of the year, our capability to deliver our products was still quite heavily restricted by our capability to purchase components, namely semiconductor components. So situation in the semiconductor market remained quite challenging during the first half of the year, and we expect that the challenging situation in that market to continue at least for the -- for the -- during the rest of the year. Maybe some point of time in the next year, there would be a balance in the supply and demand of semiconductors and situation would start to normalize from that point of view. But it's expected that this -- access to the components needed in the production of our products will remain challenging during the whole this year. In the product offering side, we introduced to the market our new field phone. So new really modern digital field phone for that market segment. In the domestic defense market, we continued our excellent cooperation with the Finnish defense forces. Finnish Defense Forces continue to work to enable the operational usage of our new SDR radios handheld and vehicular radios. They also ordered narrowband waveform development to complete the waveform portfolio or capabilities of these new products. We also received several orders from -- based on the frame agreements that we have with the Finnish Defense Forces for our TAC WIN and Comnode products and also got an order for the development of the next software version to the TAC WIN system. Generally, we were able to grow our service business in the defense market, meaning that they -- that we were developing features to the specific customer needs getting, of course, revenue from that and margin from that. But also at the same time, utilizing this customer financing to improve the competitiveness of our products. So getting new features to the production systems in the -- by using customer funding. So good progress in that area. In the international defense markets, we continued deliveries to our 2 current biggest outside Finland customers, Austria and Estonia. We also delivered several systems to the weapon system manufacturers or sensor system manufactures. So big international companies that are providing such solutions to their customers that are using our products as a communication solution in part of their system. For example, in the air defense systems, you'll need to have efficient and robust and data capable way of transferring data from sensor to the weapon itself and the -- our current technology offering is very competitive for such solutions, right, our hardware and our TAC WIN waveform, we believe that we are really tearing the leading edge, what comes to capabilities of -- data transfer capabilities in the tactical systems. Now when we reached like the first phase of readiness there with our new SDR radios handheld and vehicular radios. Now we have also been able to start several pilots in several countries with these new products, and these are important first steps in this process to finally get in the volume production and volume sales pace. So that's a good achievement and implementation of our strategy that we now have been able to start those long processes that finally. Finally, we'll lead the decision to purchase the products and systems. Also important milestone achieved here in the tactical communication area was this, this ESSOR Waveform from joint testing happened in June with our ESSOR partners, where this new version of ESSOR waveform, which is really the first one that is truly operational, capable, also really can be used there in the battlefield was introduced and tested together with the partners and this test went very well. So ESSOR starts to be ready to be taken into real use. Then in the secure communications side, this unfortunate situation in the world where situation is quite tense and a lot of hostile activities is happening clearly has an impact also for the cybersecurity side. So more and more governments in the different countries are focusing also the cybersecurity capabilities there in the mobile communications. The bigger late today, you have this highly secure communication fixed lines. But in the same time, more and more communication is happening there in the mobile networks. And as we have seen good examples in the world, for example, different kind of more way like because that -- that there are a lot of vulnerabilities in the modern smartphone base communications. So demand for truly secure smartphone-based communication clearly is growing. And during the quarter and the first half, we were able to start quite a few new pilots and trials and first implementations with -- in several countries and with new customers. Of course, in the first phase, the volumes are not really, really big in this first implementations, but they, they are like a good ground to grow the business in the longer run. So more and more users to the secure communication systems, it means that we will be able to grow our volumes and sales in there. Then what comes to offering there in the Tough Mobile or Secure Communications side, we introduced this kind of tactical version from our Tough Mobile 2 product to the marketplace, meaning that mechanically, this has been hardened by using accessories that it's really meant for the battlefield. So really robust mechanical solution and then easy to use for the soldier. And what does this also do with the product is that it's like a user interface and display for the situational awareness and battle management systems that are run there in the phone, a system or memory. In the same time, the phones in this tactical mode are connected to the tactical radios, meaning that you can use these tactical radios provided by Bittium or some other tactical radio vendor can be then used as a data transfer to deliver the data needed for this battle management or situational awareness systems. Then at the same time, of course, if the more networks are available, you can also use the terminal as an additional way to connect to the tactical network by using commercial like [ LTE ] 4G connections, if they are available, utilizing our secure data transfer technologies and software in there. Then medical technology side of the business. In the early phases of the COVID pandemic, we saw that there was an impact to the medical technology product market also so that health care organizations were so much focusing for taking care about the COVID patients that even the critical -- other critical health problems were not focused too much. But that's clearly over. So at least in the current pandemic situation, let's hope that it will not get any worse, we don't see such restrictions to the -- in the market anymore, but market is proceeding quite well and demand is again there. We have several products there in the process to get this new European Union Medical Device Regulation-based approval or certificate, we already have been able to verify that our organization and processes are fulfilling all the requirements caused by this new regulation and we are expecting that we would get the certificate for our new sleep apnea Bittium Respiro analysis product and software solutions still during this year. So we are not far away any more from getting this approval and starting the deliveries and business with this new like business area for our medical business. In the same time, we have already started to get the approval also -- the FDA approval for the U.S. market. And we believe that we would be able to get the FDA approval roughly in the same pace as we expect to get this MDR approval. So also, we should be able to start the sales and business development of Bittium Respiro products in U.S. still -- during this year. Demand for our ECG devices was good during the first half of the year. But still, our volume -- our delivery volume was somewhat restricted because of the component availability. During the first quarter, we were not able to deliver too much of these Faros products. And the second quarter was clearly better, but not still yet all the needed volumes we were not able to produce. And still there in that business area, the most important biggest customer was this U.S.-based Preventice Solutions today owned by Boston Scientific Group. In the offering side there in the medical technology business area, we launched to the market our new Bittium Faros 180L product, meaning that they this product is capable to acquire full heart data for 14 days without recharging. So this kind of very difficult to find a heart problems that require really long-time measurements, special device for that and good feedback from the market. The EEG side of our business was clearly most impacted by the COVID pandemic because the first application area in the -- is focus to the intensive care units. And intensive care units have been very pretty much occupied and focusing to the COVID patients. But now let's say that as we see if the situation starts to be quite normal also in there. And we've been able to proceed with the pilots and trials in there. And start to develop that business also. Then R&D services side of the business. Also we had some challenges during the pandemic times to get -- to acquire new customers because typically, this is trust business. So when you have some really important product that you want to develop and bring to your customer who do you rely to be our partner to develop this such solution you want to meet the people you want to see the capabilities, products, et cetera. And if that's for bidding, it's very difficult to open new customer ships. But now it's okay, now it's normal our sales and business development people have been able to travel and meet the customers and customers have been able to travel here and see our technical teams and to be convinced by our capabilities in there. So this business starts to be in a quite normal mode. We saw a growing demand of our R&D services there in the area of Open RAN. So Open Radio Network architecture ecosystem. This new like low orbit satellite -- satellite systems. And basically, all the embedded products where wireless connectivity is needed. If you think about 5G, what's that enabling, it's not only having a faster data connectivity to your phone. But -- that means that it will enable all kinds of things to be connected to the cloud and digitalized that have not been possible with the earlier technologies. And it means that you need to integrate this wireless connectivity to really new product areas. And our strong competencies to develop such embedded devices where wireless connectivity is connected or integrated. We are pretty convinced that there will be a good demand for our R&D services also in the future. To improve our competitiveness there. We introduced our new, like, platform cellular IoT solution. So basically, technology parts or components that we have developed in our product business area, enabling this kind of IoT LTM-based, connectivity to be integrated to customer products or systems faster and cheaper because we already have ready parts of technology in our portfolio that we can offer improving our competitiveness in such cases. Well, in the -- if the product business side in our business is today restricted by availability of the components then this R&D business is clearly suffering the availability of the professionals. So employee market continues to be really, really tight. So -- and competition of the talent continues to be really tight. So this is clearly limiting and will limit our capability to grow in this area, that how much talent we can and how many new employees we can get to the company. Right. So I will now hand over to Pekka. Thanks.

Thank you, Hannu. Let's look at our financial numbers for second quarter and first half of this year. And let's start about quarterly development of net sales. Our net sales for second quarter was totaling roughly EUR 23 million. And it was while at the same level as it was 1 year ago. As we can see here in the graph, first quarter we made EUR 18 million this year and now EUR 23 million. So there is a growing trend. Roughly 70%, 70% of total net sales was product-based. Totaling roughly EUR 16 million. Half of that -- roughly half of that was medical technology related products and rest was the defense and security products. Especially that medical technology product net sales was strong for second quarter, EUR 7.7 million. It roughly doubled since this first quarter this year, and it was higher also compared to last year. One reason for this strong second quarter for medical technology. Net sales was that during the first quarter, we had shortage of components, and we were not able to deliver so much products as we planned. Partially our manufacturing lines was stopped. And during second quarter, we were able to -- able to start those lines again and then we were able to deliver also those products, which was originally planned to deliver to customers during the first quarter. Defense and security products declined. It was roughly EUR 8 million during second quarter as it was EUR 11 million in the last year. There is one matter is the shortage of components, but also another matter is the timing of the deliveries of the products, which varying between quarters. Service-based net sales was roughly EUR 7 million and roughly less than EUR 4 million of that was Connectivity Solutions, R&D services, which remained at the same level as the last year. And the rest is mainly Defense and Security-related services, as Hannu mentioned earlier, and it grew during this quarter. Let's look then the net sales for first half, the total net sales for roughly EUR 41 million and it grew 3.4%. 2/3 of that was product based net sales totaling EUR 27 million. There, the Medical Technology products declined compared to last year, but at the same time, Defense and Security products increased. Service-based net sales was roughly EUR 14 million. And again, there, the Connectivity Solutions net sales remained quite at the same level as it was last year. It was EUR 8 million for the first half this year. And again, there is a Defense and Security-related services, which grew. Operating result for second quarter, we made the total was operating profit, EUR 0.8 million, 3.5% of net sales. It was quite at the same level as it was 1 year ago. This covered not even, but quite close to operating loss, which we made during the first quarter this year. So totaling the first half operating result was negative. We made -- it stayed on the losses side. So operating loss was roughly minus EUR 0.2 million. Anyhow, it was better than and it was -- as it was the last year when this was minus EUR 0.7 million. Okay, the net sales increased, and we earned a bit more gross margin, of course, of that. But at the same time, our costs of R&D, R&D activities increased because we capitalized less development costs during first half as we did last year. During this first half, we capitalized EUR 3 million as we made EUR 4.4 million capitalization during last year, so EUR 1.4 million were more costs, but taking gear -- noticing that amount, it was good -- good progress there that vertical result was better during the first half as it was 1 year ago. Okay. This R&D investments, as said about this capitalization, the total R&D investments were roughly EUR 11 million, representing 27% of net sales. And both numbers, this ratio and this absolute euro amount was at the same level as it was last year. There, we have started to change our focus to development from defense and security products more to medical products to end of last years. And that is also impacting for the first half this year. Then the cash flow, in the first half total cash flow was 0. Cash flow from operating activities was plus EUR 6 million. And there, the net working capital remained at the same level as it was the end of last year. Then we invested EUR 3.7 million and EUR 3 million of that is capitalized development costs, as I said earlier. And financing activities was minus EUR 2.3 million. It includes dividend contribution made in April, which was EUR 1.4 million. So the total in 0, as it was last year, roughly minus EUR 6 million. So good progress there also. And then our balance sheet, still strong, still stable over the past times. The total amount of the balance is EUR 165 -- roughly EUR 165 million. And when we [ lose ] assets, roughly 50% of that are noncurrent and current are roughly 50%. Noncurrent assets, EUR 85 million and major item there is a developed capitalizations totaling EUR 48 million. Current assets totaling roughly EUR 81 million, and there is a [indiscernible] close inventory, roughly EUR 22 million, trade and other receivables, roughly EUR 37 million. And we -- our cash balance in the end of June was EUR 22 million. And on other side of the balance is the equity liabilities, equity ratio still very strong, roughly 71% and liabilities side interest-bearing debt, about EUR 22 million, and it has remained stable as well. And the net gearing ratio quite close to 0. So the balance sheet is stable, as I said, and is still in strong shape. Okay. That's a very brief, brief review for our numbers. And next, Hannu will tell about our outlook for current year. Hannu, please.

Thank you, Pek. Yes. As said already, the component situation remains challenging, still during the rest of the year. And that cause is really weak visibility to the second half and the whole year. Naturally, there are also other like geopolitical risks that have increased like inflation, problems in the logistic problems in the logistics chains, et cetera, caused by the war and other issues. That may have an impact to the Bittium also, but our main challenge clearly for this rest of the year is still the semiconductor market situation. So as said, not too good visibility for the rest of the year. However, our forecast for the rest of the year is as such that we believe that our net sales will be roughly in the same level as it was in the previous year. So about this EUR 87 million. And our operating profit also as we see that the third quarter of the year will be negative, we believe that the whole '22 operating result of profit will be positive. So this is the outlook for the rest of the year. Okay. Thank you for participating to the meeting. Have a nice rest of the day. Thanks.