Enea AB (publ) (ENEA) Earnings Call Transcript & Summary

Thank you very much, moderator. This is Jan Häglund, CEO of Enea. So I'm very happy today to announce that Enea has acquired Aptilo, a Swedish software company. Yet another important milestone for Enea. During this call, Björn and I will take you through some of the details about the acquisition, some of the driving forces and the rationale for the acquisition. On Page 3, we summarize today's announcement. We have acquired Aptilo. Aptilo is very much like ourselves, a Swedish company with international reach. Aptilo is a leading provider of quality and access control solutions, targeting, in particular, carrier Wi-Fi and Internet of Things. Aptilo has a wide and established customer base, deployed by more than 100 operators in 75 countries. Aptilo's go-to-market model, it is a combination of direct sales, primarily to service providers and operators as well as indirect sales through partners and other solution providers. With the combination then of Enea and Aptilo, there are a number of new and interesting opportunities that emerge. In particular, the combination of 5G and Wi-Fi, and Wi-Fi 6 being the latest Wi-Fi standard creates a pretty unique offering that we have the chance of expanding. It strengthens what is already Enea's focus area, mainly data management and it adds new customers and additional sales capabilities, also to a large extent, complementary to what we've heard today. We'll be coming back with detail. On the next slide, just a quick summary about Aptilo, Aptilo has been then, until today, privately held with Norvestor V fund as the majority shareholder. It was founded back in 2001. It's headquartered in Stockholm, Sweden, like Enea. And it has 2 sales offices, primarily in Dallas, U.S. and Kuala Lumpur, Malaysia. Björn, would you like to take us through some of the financial details of the acquisition on the next page?

Sure thing. So with acquisition financials. The enterprise value was SEK 150 million and that generates a [ 1.7 ] enterprise value to sale, mainly financed by additional bank loan. Transaction cost was SEK 4 million, and that cost will mainly book in the third quarter as a nonrecurring item. And this will, of course, impact the profit for this second half of 2020, so we expect this transaction and acquisition to be EPS accretive starting from next year. Looking on the financial slide, next slide. There, and the estimated sales for this year is SEK 88 million and that -- comparing that to last year, annual sales of SEK 90 million, the year before, SEK 84 million. We feel like some small impact of the coronavirus here as well. Looking on the margin, it's initially slightly dilutive to Enea's target margin of 20%. But we target that this business will generate margin around Enea's target margin by the end of next year. And this is acquired today and will be consolidated from today as well. And the estimated sales for the fourth quarter, being part of Enea's books, will be around SEK 25 million.

Very good. Thank you, Björn. So back to me, Jan Häglund. So let me talk a little bit about why we did this acquisition, the underlying driving forces. Page 8 here, talking about some of the important market trends. We all know that 5G is coming big time and is one of the major trends in telecommunication industry. There is another parallel trend with the evolution of Wi-Fi, and in particular, the new Wi-Fi 6 standard, whereas later this summer, there were decisions about freeing up more spectrum for Wi-Fi 6. We believe that like many other players in the industry, that is, the combination of 5G and Wi-Fi 6, which will be critical for future wireless communication, both consumers as well as enterprises. Another key trend is the utilization of cloud for delivery of services. Software-as-a-Service is growing rapidly and becoming more and more what enterprises and organizations use for the consumption of services. This fact here, about 73% is just one number out of many of how important this trend is. It's also step-by-step affecting telecommunications industry. And then the third important trend is if we just look around us, how the Internet of Things is penetrating and helping our daily life, today, estimates say that more than 10 billion devices are connected to the Internet. And it grows every day. So in fact, all these business trends underline why we have acquired Aptilo. On the next slide, summarizing Aptilo's offering. Aptilo has an offering for business-to-consumer Wi-Fi, which is very much about offloading cellular networks in hotspot to use more spectrum and to get more capacity out of the network. Aptilo also has a well-accepted and well spread offering around operated business-to-business Wi-Fi, where operators and service providers can offer other enterprises Wi-Fi. So it could be, for example, shopping malls or airports or similar. The third leg of Aptilo as well as the fourth are about Internet of Things, where Aptilo, since a few years, has an offering for Internet of Things, both policy control as well as zero touch provisioning of devices. So all in all, this plays very well into some of the driving forces around the industry. And the penetration with more than 200 million people, more than 100 service providers in more than 75 countries, I think, speaks for itself about Aptilo's business being well-established in many years. Adding on the next page, showing that Aptilo has a go-to-market model, which is a combination of the direct interaction and sales to operators and then also indirect, both through technology partners as well as other channel partners. Aptilo also operates in 3 primary ways delivery products. One is to delivery of software, software licenses, which also generate software license revenues. But Aptilo also does managed services as well as cloud-based software as a service. And I think this combination of flexibility is also a strength that we value highly. Being a software business with high gross margins and with these kind of business models also generate good and healthy ratio of recurring revenue, being more than half of Aptilo's total revenue. The next page, a bit more detail about the go-to-market model. Aptilo operates both through market and technology partners, large companies like Cisco, Nokia, CommScope, and also with -- directly with operators, important customers like Telia, for example, of Scandinavia; Swisscom, Switzerland; TELUS of Canada and many more. So Aptilo and Enea then together. Slide 13, we've shown several times for those of you who are following us, this is how we sometimes show Enea's portfolio and also how we're investing for the future. As you know, we have areas where we can claim #1 positions in traffic intelligence, embedded operating systems and video traffic optimization. And we also have new areas, areas of growth, where we have at least Tier 1 position. For example, in edge virtualization, network data layer and 5G data management. And the later 2 then target core networks, in particular, and also even more core networks growing into 5G, with 5G core being one of the new standards that a lot of focus is on right now in the industry. Now Aptilo comes in as a very good complement to this, fits into the core network area. And as mentioned before then, have capability, functionality, portfolio and customer base in the areas of Wi-Fi and Internet of Things management. So all in all, we see this acquisition as we've been looking for as something that, in a good way, complements but also strengthen us -- strengthens us in our focus area, which is data management for core networks. On the next slide, speaking a bit more about the longer-term vision, I mentioned 5G Core. The 5G Core standard was, in fact, created and conceived to be a common standard for multi-active network, starting with 4G and 5G accesses, but the plan has been all along to expand into other types of accesses. For example, Wi-Fi or fiber access. And what this does is now the acquisition puts Enea in a pretty unique position then to be able to offer and expand functionality, both quality in active control for cellular and Wi-Fi and also the management of both mobile phones and IoT devices. So I'm really looking forward then to taking this evolution also into the future and into the new standards following with 5G Core. On the next slide, we expand a bit more on the customer base. As you may know, Enea divides the business in 3 product groups: Software Development Services; Operating System; and the largest, Network Solution. With this acquisition now, Aptilo, which will be consolidated under product group Network Solutions. Network Solutions, which has been the growing area during the recent years will become even more important for the company. And Aptilo brings then an installed base and customer relations, which is similar but complementary to Enea. It's a combination, as mentioned before, of channel partners, established relations with solution providers and also direct relations with large operators like Swisscom, like Telia, like Batelco and several others. So I'm thrilled about that and also believe that this creates opportunities for cross-selling down the road to both of Enea's portfolio as well as the Aptilo portfolio. So just to summarize by just reiterating that Enea today announced that we have acquired Aptilo, very happy about that. Aptilo being a leading provider of Policy and Access Control solutions for carrier Wi-Fi and IoT. Aptilo's enterprise value in the acquisition amounted to SEK 150 million. And the rationale, the reason and the plan is to strengthen Enea's data management portfolio, to extend the market reach and also to materialize new opportunities, both in 5G, Wi-Fi, Internet of Things as well as software reserves. So with that, I'd like to thank you and hand back to the operator.

[Operator Instructions] We have a question from the line of Viktor Westman of Redeye.

Can you hear me guys?

Yes. Relatively well, Viktor.

Okay. Good. So I saw this company has a downward trend in sales all the way since 2015. So you say something about what's behind that decline?

So it's correct. But if you go into the history of Aptilo, Aptilo has changed its strategy during the years of '16 and '17 into becoming more focused. More focused on the services that I mentioned and also more focused towards a certain market. During the recent year, that evolution has actually stabilized and some of the numbers that we also published, you'll see that the trend recent years has been much more stable. So in other words, there -- it could be an underlying growth in the newer areas. Well, we published some of the numbers in the press release. I think last year, you saw a sales of SEK 90 million, the year before was SEK 84 million and the estimated sales for this year is SEK 88 million, possibly with some corona effect on the top line.

Yes. Understood. And -- but this -- still this, I think this acquisition differs a bit from the ones you did in say, Qosmos or Openwave that were growing businesses, I think in some way, whereas this one has struggled a bit. Have you done any changes in your M&A strategy?

No. I think this follows our M&A strategy. And we have said all along that we're looking for businesses which are established, where there is both an offering as well as the customer base, which is complementary to Enea's and where we believe that we can do things for the future and I think some of the underlying business trends I showed you in this call. So that's why we believe that the timing of this acquisition is the right one.

Okay. And last one, will this affect your Policy and Access Control business in any way? I know that you mentioned this will be run as a stand-alone unit, but are there any plans or anything to do to -- any synergies or anything?

Yes. We will follow the same integration or the same strategy as we've done with the previous acquisitions to keep Aptilo as a separate business unit for -- to focus on the business, to focus on the customer base. And then we will, of course, step-by-step, look into how we can utilize the strengths of both companies, and that could be both internal on administration or cost or towards customers, for example, cross-selling our portfolio. As you point out, in our Policy and Access Control portfolio, which very much targets service providers, but more on the cellular side, 4G and 5G is complementary to what Aptilo does. So I believe that down the road, there will be possibilities, both on the portfolio side, and also very much on cost saving. But we will take that step-by-step as we usually have done.

Our next question comes from the line of Frank Maaø of DNB Markets.

Congrats with the acquisition. So part of my question have been answered. But if I may, could you talk a little bit about the competitive space in -- within Policy and Access Control for the Wi-Fi market? And also the IoT connectivity management with provisioning and so on. That I understand is kind of the 2 main areas of Aptilo in terms of -- you clearly say that Aptilo is a leading company in the space, but it is a small company. And if you could give some color on market shares and competitors, that would be nice.

Sure. Thank you, Frank. So I think Aptilo has a position similar to Enea, that it's a leader being independent as a provider. There are then -- there is then competition, of course, and competition comes from different angles. It can be competition from large service providers that have this as part of their offering that could be, for example, telecommunications or even enterprise solution providers that have this kind of functionality, maybe not exactly the same but similar type of functionality as part of a larger solution offering. Competition can also come from Wi-Fi hotspot providers that add software functionality for the management. And that, in many cases, is not as advanced as Aptilo has. And in many cases, service providers have chosen Aptilo's software as a complement to the more basic functionality that they have that go together with the Wi-Fi hotspot. So as an independent company, focusing on the Policy and Access Control for these areas, Aptilo has a strong position on the market.

Interesting. So thanks for that. That's clear. When it comes to -- I mean, it is an almost 20-year-old company. Can you -- about the ups and downs during that period? I mean you gave some color on 2018 and '19, but a little bit -- looking backward a little bit. Has there been periods of decline? Or has it been up and down? Or has it actually been building a growth company step-by-step, which has matured a little bit now, perhaps? And also secondly to that, why do you think the current owner is selling the company to you right now? It's always the same old winner's curse kind of a question perhaps there, but if you could give some color on that, would be great.

Okay. Yes, I can't really speak for the current owner. I think that's better that they would speak for themselves. But talking about Aptilo's history, it's correct that Aptilo has been around for a while. It has grown on own merit, but it's also been through a couple of transformations. I think we all know that the role of Wi-Fi has been changing in the history. I mean, in some -- we all use Wi-Fi, I think, in our everyday life. And I think during some periods, Wi-Fi has taken a role primarily offload. I think during other times, Wi-Fi has emerged as a preferred way to offer, for example, public connectivity, and that is still underlying and still growing in some parts or in many parts of the world. And then I think Wi-Fi has emerged also with the price points and especially the access to unlicensed spectrum, has an interesting opportunity also for future connectivity. And here, the whole sort of wireless trend also around enterprise is something to watch. And that's what I touched on before that Wi-Fi -- it's not about Wi-Fi or cellular access, but more the combination. So I think we believe that the role of Wi-Fi will continue to be important. It will have its niche. But I think the work that Aptilo has done during recent years to streamline both portfolio as well as go-to-market and market presence has been very good and healthy, and we can leverage that more sort of a slim and streamlined company now going forward.

Our next question comes from the line of Simon Granath of ABG.

Congrats on the acquisition. I think that many questions that I had in mind had already been answered. But initially, perhaps you could clarify for us a little bit on when we could see the cross-selling opportunities that you are seeing? I know that you touched upon it, but could you provide us some more color on it? And that would be great.

Thank you, Simon. But as I said, we will do what we usually do. So we focus on a successful integration, making sure then that Aptilo comes in under a new home, as a separate business unit of Enea. We want to make sure that we have stability for the employees, for the customers today. And then we take it from there. And I think, as hopefully was obvious in the presentation here, we are quite similar companies, not only are we both based in Stockholm, which will facilitate integration and also people-to-people interaction, but also we have similar kind of go-to-market models and similar kind of target customers, but interestingly enough, quite complementary also, what are the top customers from Enea versus Aptilo. So that's something we will work on. Then as we all know, the sales cycle in telecommunications are quite long. And normally, it can be 12 to 18 months in terms of winning new business. So it will take some time, but we will, of course, expand over time to start to investigate that right away.

Is it also possible to give us some ballpark figures regarding the sales competition, both in terms of whether it's mainly targeting operators or carriers? And also in terms of the sale split between on-premise licenses and support and maintenance. I know you said that the company has more than 50% recurring revenue, but some more ballpark figures on the other parts would be very great.

Yes. As of today, we don't disclose any more details on the split between different business models or different parts of the business of Aptilo.

Our next question comes from the line of Daniel Koria (sic) [ Ramil Koria ] of SEB.

I take it that was for me, Ramil, from SEB. Congrats on the acquisition. I have a few pretty stupid questions, so sorry in advance. But just first off, sort of the partnerships or the indirect sales models to Ericsson and Nokia. Could you elaborate on what specifically those types of channels mean? Are you the sole vendor for these solutions through Ericsson and Nokia?

So thank you, Ramil. I have to pass on the details of that. I'm not sure exactly what has been, of this time, that I suspect that the details of those relations are not public. So it's something we'll have to come back to if we have reasons to make it public. I think what we can say today is that there is a relation where historically Aptilo has been complementing some of the large solution providers in their solutions based on the strength and specialty that Aptilo has.

Understood. But just a word or 2 perhaps on sort of the bundling potential from a partner point of view, what could they add theoretically speaking? And I know this is a very broad question to Aptilo's solutions and then upsell them just to get a feeling for what exactly is provided here.

Well what Aptilo does is that it provides, for example, as I mentioned before, advanced policy and control solutions for carrier Wi-Fi. That could be, for example, business to business. As I mentioned, a carrier wanting to offer, say, a chain of shopping malls or similar, the possibility then to have Wi-Fi or a connectivity offering, perhaps in a different business model, it can be, for example, advertising, finance. So that's kind of advanced policy control while you target different services to different customer groups is something that Aptilo has been specializing in. And that offering is quite unique, and Aptilo is well-respected for that. And in many cases then, that can come in and complement an offering from -- for someone who offers more of the connectivity solution. And that could be everything from the actual hotspots to the more basic connectivity functionality.

That's clear. And then perhaps squaring this to ask you on solutions, how would these solutions square up to them? Is there any bundling potential there? Or are they perhaps competing potential on the market?

So there is very little competition or overlap with what Enea does. We -- as we've been targeting before, we have an offering already in Policy and Access Control, which is an important part of the data management piece of today than tomorrow's core networks. Our focus so far has been very much on wireless access. But as I mentioned before, the trend goes towards building networks that can handle different kind of accesses, different kind of business models with the expertise and solutions targeting Wi-Fi and IoT. We believe that it's a great complement for us, both today and also going forward.

That's clear. And then looking at the markets, I mean, I guess we're still a few years out from peak IoT, for lack of better words, should we expect growth to potentially gain speed ahead? Or how should we sort of regard the underlying market share?

Yes. But we have not guided into the future development of Aptilo here. I mean, we have given the financial impact where we show them that thanks to a high ratio of recurring revenue and stable business models and stable customer relations Aptilo has, despite a very tough market that we also are experiencing as Enea this year, has been able to hold up revenues in a good way. That's why we forecast revenues almost on the level of last year for Aptilo. Then as you say, there are growth vectors on the market, the growing amount of IoT devices. So it's about taking a part of that market, starting from small numbers. And it's also about the evolution of the role that 5G will take together with Wi-Fi and in particular, Wi-Fi 6, also a nation's market or it's as late as this summer that the Wi-Fi spectrum was broadened and expanded by some of the regulators across the world. So that's also something that will be exciting to follow what that means in terms of investments and opportunities. So we'll be working hard to capture some of those opportunities. But I can't give you more sort of financial guidance or outlook at this time.

That's fully understandable. Just 2 final questions from my side, and we've touched upon the first one, at least. But on the upselling potential, I mean, we know for a fact that, at least the biggest carriers have quite dispersed procurement functions. And given the pure overlap with sort of Enea's existing portfolio with Aptilo's portfolio isn't enormous and then targeting to some extent, different parts of the network. How do you sort of reckon that the initial phases of upselling would happen more specifically? So another broad question, but any flavor is helpful.

Sure. No, but I think it's well-known that it's important to understand customers, to have the trust of customers and to have established relations. Then of course, you need to fight for every piece of new business. That's always the case. It's a very competitive industry. So nothing comes for free and nothing comes directly. There are long sales cycles in telecommunications. But having said that, I'm very excited about the fact that we have a complementary customer base, where we have the opportunity of using the trust and the relations to also position other parts of our portfolio going forward.

It's crystal clear. And then a final one, perhaps doing what financial markets always do. How would you reason about more M&A opportunities from here? Is that a question of focusing on integrating Aptilo and trying to find upselling opportunities? Or would you be opportunistic for new M&A opportunities?

So I think today's announcement and acquisition shows that we're delivering on our strategy. We have said since a while that M&A continues to be part of our strategy, especially as a complement to the investments we've done during recent years and also as a complement to the organic investment that we continue, for example, towards 5G virtualization on fiber security. That said, we will continue to be picky. We will look very carefully to companies that both can deliver value in terms of being established as the businesses, at a reasonable price and also companies that complement us in a good way that have touch points where they complement either portfolio or customer base. I think Aptilo fits the bill on all those criteria. So I'm very happy about that. And going forward, I believe that we have a financial position with strong profitability and cash flows that we've been able to generate in the history to take further steps. But as I said, we -- it's always about focusing on the integration you have, and then we will continue to pursue our strategy, where the organic growth and organic investment is our base, and then we will continue to look for complementary acquisitions.

Congrats once again.

Thank you, Ramil.

[Operator Instructions] And there are no further questions at this time. Please go ahead, speakers.

I'd just like to thank you for listening to this. We are happy about the acquisition of Aptilo. It's yet another milestone for Enea and just stay tuned for how we evolve that going forward. And thank you very much for listening.

Thank you.