Bittium Oyj (BITTI) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to this webcast. My name is Karoliina Malmi, and I'm Head of Communications and Sustainability at Bittium. And with me here are our CEO, Petri Toljamo; and CFO, Petri Hiljanen. Today, we are going to talk about our financial development of the second quarter of this year and the first half of this year and, of course, the main events resulting to the results. And at the end of the presentation, we have reserved some time for the Q&A. So anytime if you have question, you can place through that Q&A button on your screen, and at the end, we will go through your questions. And before we start today about forward-looking statements, they may have risks and uncertainties and may occur differently. So bear that in mind. But without further ado, I will let Petri to start.

All right. Thank you, Karoliina. So I'll start with the highlights for the second quarter '26. So first, our net sales grew 60%. EBITDA was 27.5%, and operating profit was 22.2% of the net sales. Our operating cash flow was EUR 8.8 million. Our new orders -- order intake was EUR 46.3 million, and we have personnel at the end of the Q2, 575 employees. Let's then look at the first half. Net sales growth was 37.2%. EBITDA, 22.3% of the net sales, operating profit, 16.6% of the net sales. Operating cash flow, EUR 36.9 million, new orders, EUR 81 million, and our order book, EUR 102.2 million. And I'll summarize this briefly, the first half. I think that our financial performance was excellent, both on the net sales and operational results, we were within company's strategic long-term financial goals. Also the technology leadership and future investments through the new product launches and strategic partnerships, I think that we are progressing pretty well. Our second half was very active announcing new different investments and announcement on the product side. Also, we have put emphasis on the scaling the operations to ensure fast deliveries, also investing in process development and data-driven systems continued as well. The main driver for the good results at Bittium was the Defense & Security business segments, driving the growth, 67.8% on the first half and also very strong order intake. Medical turns profitable and the restructuring start to pay off. Engineering service side is still a challenge. The market is not very positive at the moment, and we are doing a turnaround there. Our ICB sector reclassified to defense, which is enabling us to access to international defense ETFs as well. Strong cash flow, significantly strengthened financial position and record order backlog. We believe it provides a strong platform for the strategy implementation and future growth. And I'll now hand over our CFO, Petri Hiljanen, to cover the financial parts.

Thank you, Petri. Good morning, everybody. My name is Petri Hiljanen, and I'm the CFO for Bittium. Let's review some key financials for the last quarter and first half. Our sales reached EUR 36.6 million, which were heavily leaning towards the Defense & Security deliveries. Product deliveries, especially went up. The service sales was flat comparing to previous quarters. So most of the growth was contributed by product sales and deliveries. Quarterly operating result was -- for second quarter was EUR 8.1 million, and then it was an increase to EBIT of 22.2%. There was especially good performance at Defense & Security, which then, of course, offset the other segments a little bit less -- a little bit poor performance, especially engineering services was negative during the second quarter. As mentioned earlier, the -- for second quarter and also for the first half, the sales growth was contributed mostly by Defense & Security product deliveries. Medical grew a bit, some 6.3%. But then again, as mentioned earlier, the performance with engineering services was not at the level that we are happy with. So the top line went down there. And now as we can see that momentarily, we have been exceeding even the long-term target range for sales, but that's then again heavily related to the cyclicality of the deliveries and the quarterly sales has been fluctuating during the past years and then past quarters. So that, of course, is explaining that part. And now the margins for the first half, it gives us a solid base to go forward and to develop further our strategy, especially in the Defense & Security area. That fluctuations, as you can see here, are quite high between the quarters and first half, especially has been lower than second half, but that's again something that we are not going to be considering as a change here from the previous years. Investments for future growth. We invested more than EUR 10 million to R&D. Of course, percentage-wise, it was a little bit less than earlier. But then again, our sales went up so much that it's explaining the little bit less -- a little bit lower percentage. Our investments and capitalizations were something like EUR 3 million during the first half, and that's especially supporting our growth going forward. Our long-term financial goals here, as we can see, we are confirming them that the annual growth target is between 20% to 30% and an operating result target is between 10% to 20% of sales. Order book reached also a historically high number, and then it was more than EUR 100 million. The order book has been contributed mostly by the Defense & Security, and it's concentrated there the -- our customer base also has been mostly there. Our confidence, of course, is that the -- we still -- confidence for the outlook is still there. So we keep our outlook for this year. Sales, EUR 140 million to EUR 155 million and estimate that the operating profit will be in the bracket of EUR 26 million to EUR 32 million. So that's about the outlook. Cash flow was extremely good. And now we can see and confirm that we are net debt-free company. So operating cash flow was EUR 36.9 million. We were able to convert a huge amount of net working capital to cash during the first half. Operating cash, as mentioned, it was close to EUR 37 million, and it leaves us a good base to continue with our development path forward. We informed this morning also that in addition to earlier paid dividend, we're paying an additional dividend of EUR 0.15, and then it will be paid shortly. So there was a stock exchange release this morning. You can refer to that. And balance sheet here as a final note. So we're in a good position to go forward and continue our growth and then even look for additional items that will help us grow. Key items, of course, are the capacity investments in production and development also. And then, of course, as mentioned earlier in the strategy communication that, of course, we're looking and we're interested in other companies and working closely with certain partners and those kind of things. So healthy cash flow, healthy cash position, and that's a good basis for our future growth. And now Petri, please.

Thank you, Petri. So that's covered the financial part. I'll now focus on our business segments, starting with the Defense & Security. So if we look at the numbers first, so net sales on the Defense & Security grew 100%. And our operating margin was 30.6%, which shows excellent profitability. On the half year level, the net sales was 67.8% growth and operating margin 24.5%. If we then look at some highlights, what happened on the first half on the Defense & Security. First, R&D investments was EUR 6.6 million, new orders, EUR 64.4 million and order book, EUR 94.2 million. So order book remains at a very high level. We managed to secure a lot of the orders during the first half. Also, we managed to win deals from the key customers on the first half, Finland, Austria, Croatia and Estonia. We are also progressing well with the new customer acquisitions. We also announced several strategic partnerships on the first half, namely Himera, for example. Also, we were active on the new product and solution launches to new verticals, FUSOR, which is the software-based routing product, Tough SDR Unmanned for the drones and MissionNet for the battlefield interconnect. Then Bittium SafeMove product portfolio was unified more towards the complete overall software offering. We are also investing aggressively on the AI integration. We launched 2 partnerships, NestAI and MarshallAI, which was announced earlier. We are also increasing our own efforts on the AI to make sure that the AI will be actively involved with our products going forward. Also, we have done hybrid network solution demonstration with -- for the Finnish Defense Forces with the Telia and our production capacity was scaled up to meet the growing customer demand. That was we started already last year and I think we have -- I believe we have succeeded pretty well with this one. Also, we signed a NATO framework agreements regarding the secure communication products. Geopolitical uncertainties continues, increased the defense budget allocations for the defense. So we are satisfied with the Defense & Security progress on the first half. Let's then look to Medical. So we had moderate growth and this profitability turnaround is proceeding. So the net sales on the second quarter was 3.2% year-on-year. Operating margin, 2.1% of the net sales. Then looking on the half year development numbers. So net sales was 6.3% growth year-on-year and operating margin 5.5% of the net sales. Then looking then the medical highlights. So we are seeing positive signs of this turnaround. We are not yet satisfied with the level where the operability and the growth is. We are seeing a lot of long-term potential for this business. And we can say that the strategic focus on the cardiac and sleep are delivering now results. '25 restructuring cost benefits are now fully materialized, and we are saying that this profitability turnaround has been made. Cardiac business outside of the U.S. in the first half did grew 33% year-on-year. Also, the collaboration with Boston Scientific is progressing as planned and which is also the year-on-year growth. Sleep business side, it's still developing. We are awaiting results from the pilots by the end of this year, and we have signed several new distribution agreements in Europe and new growth markets. Also, we are planning to launch new long-term EKG monitoring device on the second half '26, expecting to accelerate the cardiac sales. Also, we are continuing R&D investments for future product innovation as well. And like I said, the positive outlook for the future growth and summarize the numbers. So the R&D investments on the first half, EUR 2.9 million, new orders, EUR 9.8 million and order book EUR 5.3 million -- sorry, EUR 5.4 million. Then we continue to look at the engineering service. First, the numbers on the quarterly. So net sales decreased 14.5% and operating margin was negative. Also on the half year side, the net sales decreased 20.9% and operating margin was negative. And then let's look at the highlights. So of course, we are not satisfied with the numbers on the engineering services. We are seeing a little bit difficult market on this engineering services side. We have also decided to make sure that we are utilizing the engineering services resources to help the Defense & Security business segments as there are many programs and opportunities in our hands. So the first half was weak, mainly because of the market situation. We communicated last year that we are making clear strategic focus towards the defense sector and embedded AI, and this is now progressing. We have made the first defense industry client wins, which is validating the new strategic direction. We launched a partnership with VTT as a defense R&D partner. Also, we changed the leadership. Hanna Hulkko started as a Senior Vice President for the segment earlier on the first half, and she is now focusing to make sure that we are able to make this turnaround and reposition ourselves for this new service areas. Staff utilization maintained through the Defense & Security project contribution, and we expect this weak market to continue also through this '26. However, there are growing European defense budgets and Europe's push for the technological sovereignty and the increasing adoption of the Edge and embedded AI creating new opportunities for these segments. And we believe that the long-term competitive advantage comes from the deep embedded software and hardware expertise combined with the practical AI application capabilities. And we are believing that will position ourselves as a strong partner for companies seeking to integrate AI into the product development, particularly in the defense industry. And then summarizing the first half, we are delivering on our strategy. The main focus is acceleration of international growth. We are making clear progress there. Our growth is solid and our market outlook remains good. We are also now turning the growth to profits, which means converting to the cash. Defense megatrends is structural tailwind for both Defense & Security and also increasingly both Engineering Services segment as well. We are believing that our long-term competitiveness will remain because there's a strong innovation pipeline, what we have. Clear strategy, strong execution and favorable megatrends are the cornerstones for the future growth. So thank you from my behalf.

Yes. Thank you, Petri. Now I think it's time for Q&A. And I have received a lot of questions here, and you can still place questions if you want, and we go through as many as possible now here. But let's start both of you. The first question, can you comment on the expected revenue phasing this year? Are you progressing in line with your expectations? Or were things moving faster than you anticipated in the start of the year?

So I think we have said that there will be fluctuation between the quarters. Our first quarter was moderate. Second quarter was excellent. And I think that after the first half, we are proceeding according to the plan. We are still expecting second half to be stronger than the first half, and our confidence remains high to meet our guidance for this year.

Good. Thank you. So and Bittium has told that it has negotiations ongoing or discussions ongoing regarding tactical communications at least in 10 countries in Europe. Are these discussions still ongoing and how they are going? And when are you expecting some deals resulting from these discussions?

So we have been very actively discussing and advancing these customer cases. These are kind of national cases, which are quite high and big cases, and there's a tendency that this will take time. The positive thing why our order intake went high on the second quarter also on the first half, we have been -- in addition to these national deals, we have been able to win new customers from the weapon system providers. Some of these are smaller. Some of these are one-timers. Some of these will be repetitive orders. But the amount, of course, we would like to announce that, but many of our customers are not letting us, unfortunately, to announce this. But -- so we are expanding our focus, not just from the national countries or country-based deals also to weapon system providers. And that doesn't mean that we are less interested about the national deals. Of course, this is our main focus, but it's very difficult to predict or forecast that when we will land those deals. We will, of course, announce those separately.

Yes. Thank you. I think you answered with this -- answer already this next questions about the defense margins in Q2 compared to Q1. What resulted to these margins? And can you comment?

So I think that, of course, that we managed -- the order intake was high. We managed to deliver our service business in general was pretty flat. So the growth came mainly from the scaling and increasing the volume for our Defense & Security product business. And that we will see the impact on the profitability right away.

Okay. And related question to that. So can you comment on the status of current Indra deliveries and any potential licensing income for Q2 was there?

So we are not opening individual customer kind of revenue recognitions, but we can say that we have delivered everything to Indra according to the plan and things are progressing as planned. And we are very satisfied with the collaboration and the partnerships with Indra.

What capabilities have you increased to strengthen your tender capabilities, as you mentioned?

So of course, this is one area. So we have actually increased quite many resources in over a year. And we have said that we are going to emphasize and increase capabilities for sales, marketing and customer-facing operation and bidding and the tender process capabilities is one element, of course, we have to also make sure that we are strengthening while we go forward.

Yes. And you also highlighted the client pilots that they have been progressed within the Defense & Security. Has the number of potential clients you are discussing with increased?

I would say that this national side, we are still working with the 10 -- roughly 10 different ones. But of course, I can maybe say that the weapon system providers, I think the number of the discussion, I think, has increased.

Yes. Thank you. Talking about geographically, so where are the most lucrative markets for Bittium? Are you considering Asia and -- or even Latin America?

So on the Defense & Security side, I think the main focus is Europe and of course, with some extent, Asia. So we have some customer wins there. We will increasingly add focus also on the Asia Pacific as well selective markets. Of course, the medical is then the global focus.

Yes. Congratulations on the strong results. Is there any prepayments or other one-offs triggering strong figures?

I don't think there is one-timers. So there are multiple customers that contributed to both the orders and revenue-wise. Of course, we have said that we have announced the most significant orders and also mentioned on the announcement whether we will deliver it in '26 or '27. And we have said also that Indra is a big portion, of course, our business now. Beyond those, no single individual ones.

Yes. Thank you. Going forward to Engineering Services, what are your plans for engineering?

So our plans, I think it's pretty clear. We changed the leadership under new leadership. We are going to execute the new strategy, which means that we will continue to increase the focus more on the embedded AI and the defense markets as well as we have been helping to make sure that we are able to staff the programs what we have on the Defense & Security side. So it's a turnaround, and it's a kind of a change how we are going to position ourselves in the markets going forward regarding the offering and the required skills and competencies.

Thank you. And about medical business, is there already a plan? Or are there negotiations to sell it?

There are no plans and no kind of ongoing discussions to sell the company. Like I said that we are not satisfied with the profitability and the growth, but we are satisfied how this turnaround is progressing. Team is doing a good job. There are a lot of long-term possibilities, and that's we have kept also the R&D investments on the high level. And currently, we want to make sure that we are able to support the medical business segments to capture the growth and the profitability going forward.

Good. Thank you. Going back to Defense & Security. So how do you see the potential sales of the new product areas like the unmanned or anti-drone systems in the coming years? What kind of expectations could be realistic for the sales outside of the current core, which are the radios and...