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

Thank you very much. Good morning, everyone, and thank you for giving me this opportunity to walk you through our Q3 numbers. With me here, I have the CFO of the company, Ulf Stigberg, and him and myself will take you through the slides. We have a very simple agenda that we will follow and we'll do a short intro to where we are at this point. We'll go through the financial results, and we will discuss way forward and outlook. And this slide, those of you who are following Enea will recognize I think the important piece here is to note again that we're back delivering EPS, positive EPS. We have stable sales in the quarter, and we have an R&D percent that has changed a bit compared to the 9 months figure, and that is due to the changes we did and to having automated quite some of our processes within our R&D operation. And you see also a fantastic cash flow and a really strong EBITDA margin. So pretty solid quarter from that perspective. So I've been in this role now for 90 days, in this new role, and I worked on a couple of things that I would like to discuss on this slide. So very important for me is the simplification of processes. We are a midsized company, and some would call us a small company and the unique selling point, and unique from an Enea perspective compared to many of our competitors, is that we are flexible, we are quick, we have a sense of urgency and the processes and the behavior in the organization need to mirror that advantage. The only way we can win, is to be more agile, more flexible and from that perspective, beat the competition. Also very important in a company like Enea, public company, every quarter, we need to deliver results. We need to deliver products to customers, and we need to satisfy our Board with information and material that they can take decisions on, is to have solid plans. And this is something that is important, both from a sales perspective, as well as from an R&D perspective. We have a quite wide portfolio, a broad portfolio in EMEA. But within that portfolio, we have some really strong products, and one of the things we're working on, is to accelerate and enhance the established products, the products that we're winning the most business with, and that goes from a sales perspective, as well as from a product management and product development perspective. Winning is something I have been discussing a lot within the company for the last 90 days. It is really important for a company our size, not to spread our efforts too thin, trying to win everything. It's more important to focus our efforts on winning a few things and be sure to satisfy the customers, the needs of the customers, the expectations of the customer, be better than the competition and win those deals. In a company with this big gross margins of Enea, the difference between winning and losing, it's not 100%, but it's -- you will see later, we have 76% gross margin. So the difference between winning something that we're bidding on and not winning is enormous. So it's key for us. Security and AI; security is a big portion of our business. We need to make sure that that comes across in every aspect of the company. AI is important not only for the world, and not only for us as a marketing perspective, we're delivering products that have AI capabilities inside. It can also be important for us as a company, and we're step-by-step starting to use AI in our own internal processes. And then to be clear on why we are here? We're here to create value. This is an outcome business. We need to do that for our customers. It needs to be a big difference being a customer of Enea, and that difference should be a big positive difference to have Enea as supplier and to Enea as a supplier. From an employee perspective, we still need to attract and retain the best talent out there and for sure, also from a shareholders' perspective. We're a public company and one of our biggest and most important things is to create shareholder value. So that takes us into the Q3 numbers, and let me start with a few slides before I'm joined here by Ulf. So sales in Q3 was SEK 216 million. That's lower than the same quarter last year, but it's an increase over Q2 this year. Revenues, we have some FX impact that takes us to SEK 221 million in revenues. So as you can see on this slide, our net sales in the quarter is stable. And what I mean with that, I would like to take us to the next slide is to look at the recurring revenues. So clear is that we have compared to the same period last year, not won new license sales as much, but we have a growing recurring revenue base. And on the right hand of this slide, you can see the development of support and maintenance within our Network Solutions business, from 2020 to 2023. And you see that there's a significant growth year-over-year, which is really the effect of adding new customers, having a small churn in the base of customers and also changing contracts to become more and more term-based contracts. Even though, of course, not all of our contracts are term-based, incentive on sales and the incentive if the company is to increase the term-based contracts. You can also see on the Professional Services part of the business that we have had a good development of that over the last couple of years. We split our revenues on Network Solutions and Operating Systems, that is something that might change going forward. And the reason for that is that, operating systems are now pretty small numbers compared to the total. And one reason for that is the one-off deal we did in Q1, where we sold the rights to our -- to that particular software to one of our largest customers, which is now starting to impact the comparisons, and of course, will impact that also in the years to come. But the flipside of that or the good side of that is that, we are now having an even more predictable business. And you can see that it's very stable quarter-over-quarter. And the reason I have quarter-over-quarter in this -- on this slide is, because that one-off in Q2 is skewing the year-over-year numbers. But small numbers, predictable and very much according to plan and very much the reason for the strategic changes we've done in the company over the last couple of years. So with that, Ulf, I would like to invite you to discuss our margins and profits.

Thank you, Anders. Quarter 3 presents us a 34% EBITDA margin, which is compared to the last year's quarter 3, a little bit less, but compared to the previous quarter, quarter 2, it's a good increase. This margin excludes nonrecurring items of SEK 4.5 million, Anders talked about the gross margin. In Q3, we achieved 76.7%, which is a little bit of -- lower compared to the last year's Q3. And the reason for that is the share of license deals are less this year. What we see here also affecting the EBITDA is the result of our rightsizing initiatives. We have operational expenses that are down SEK 15 million, amounting to a number of SEK 142.9 million. But the underlying spend is even higher, as we also decreased the amount of capitalized R&D with SEK 17 million compared to the last year's quarter 3. So a quite big impact on our operational spend, helps us to achieve the improved margin compared to last quarter. This can also be measured in EBITDA less CapEx. If you compare EBITDA less CapEx with quarter 3 last year, we can see an increase from 22% to 26%. And in absolute numbers, SEK 55 million compared to SEK 51 million. And this is a very important measurement for us to see that we are back on track, and we are getting closer to our EBITDA targets for the long run. Over 9 months, we have EBITDA less CapEx of SEK 146 million compared to SEK 122 million last year's 9 months. EPS reached an amount of SEK 0.95 compared to last year SEK 1.69. One other area that we are proud of for the quarter is the cash flow. The overall operational cash flow was SEK 108 million compared to SEK 92 million last year. This also can be shown, as we have amortized bank loans, we are going down from SEK 546 million to SEK 479 million. And our cash equivalents is reaching SEK 333 million compared to SEK 264 million last year. And this results in a net debt for the Group of SEK 146 million compared to SEK 282 million last year. And net debt to EBITDA was SEK 0.64 compared to 1.10 last year. So this is really important for our going forward of the company and development, of course. As a result of the strong cash flow, we -- the Board decided also to continue with the buyback program in Q3 or since the last decision, we -- the company have purchased 374,000 shares amounting up to SEK 17.6 million for the buyback program, and this will be continued in quarter 4 and with the same framework.

All right. Thank you for that Ulf. So then I would like to finish this call with talking a bit about our way forward. So we have a wide portfolio being Swedish native, I struggle a bit with the word here. So we have an impressive telecom and cybersecurity portfolio. We have an ambitious telecom and cybersecurity portfolio, where we have a very interesting telecom and cybersecurity portfolio. This portfolio takes us into a large number of conversations with telecom operators around the world, from South America to Southeast Asia. And in this portfolio, we have some real winners. For example, traffic management, we are a #1 player in the world. You can clearly measure the performance of this product. So having this performance, increases the speed in your network with 10% to 25% compared to not having this product. We have, of course, competition, but we feel that we are very strong compared to the competitors in this space. And it's really about taking investment to add this to your network, then you come to us, or being satisfied with what comes out of the box from the large players. Also on the DPI library side, meaning we're selling our DPI functionality to people, building solutions and selling to customers. We are the go-to company, when it comes to that type of products. From a network security perspective, we are one of the leaders, and we're handling trillions of transactions every year. We're looking at messages and trying to detect threats to people [ or ] that are entering into the operators, and helping operators and consumers to stay safe. So we have a very interesting portfolio and that portfolio we're taking forward. And I would like to talk a bit about what we have done in the quarter and how we look at all this going forward. So AI and cybersecurity here, combined in a report that we sponsored during the quarter, done by Cybersecurity Insiders, shows that of the survey, 457 people that were interviewed. So it's not the world, but it's from a statistical perspective, it has some validity, 77% are concerned with artificial intelligence. And I guess most of us are, because this is not only improving much, it can also be a danger. And the e-mails, the text messages we're getting as citizens from people trying to fraudulently get access to our bank accounts or to our private details, is clearly increasing. And what's happening with AI, is also that voice will start to increase. 41% have plans to address this and 68% expects a higher budget for this over the next 2 years. And that is good for us, being the provider of software to help protect people from these types of threats. And clearly, if you're trying to protect people, companies and citizens from threats that are enhanced through artificial intelligence. Also your software needs to be enhanced by artificial intelligence. Otherwise, you will be a step behind, rather than a step ahead. So from our perspective, there are 2 key things in this report or on this slide. The one thing -- there is no question about the fact that cybersecurity and AI are 2 very important aspects for our customers. And the second thing, people will spend more money on this going forward. And that gives us some confidence in our long-term ambition here. So in this space and the space we call Network Solutions, where cybersecurity is one important part. We do expect double-digit growth over the coming years. The market will grow. We have the products. It's just, for us, important to get our internal act together, so that we can be there where we can win and win these projects to continue to support customers around the world. From a margin perspective, already in this quarter, we did 34% EBITDA margin. And this quarter, from a top line perspective was stable, but not so thrilling. It was a very fairly slow quarter. But even with that top line number, we delivered a 34% operating margin. And in this quarter, that was boosted by some payment from large customers, we had SEK 100 million in operational cash flow. That's SEK 13 per share in cash flows. So for us to stay behind double-digit growth, 35% operating margin and strong cash flows doesn't feel very, very aggressive. So we're sticking to this, and we're also sticking to the lines that we added up for Q2. We have found ourselves in a fairly difficult economic environment. We had a weak first half year. So from a top line perspective, 2023 will be challenging. But from a cash flow perspective, we do expect a good 2023. So with that, I would like to say thank you and open for questions.

[Operator Instructions] There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

All right. Thank you for that. And again, thank you for this opportunity. And if not before, see you after our Q4. Thank you, and goodbye.