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

Welcome to the Enea Q4 presentation for 2023. [Operator Instructions] Now I will hand the conference over to the CEO, Anders Lidbeck. Please go ahead.

Thank you so much. Good morning, everyone, and welcome to this conference. I'm here with our CFO, Ulf Stigberg, in a beautiful morning, 1st of February here in Kista. We are following the agenda we normally follow. I will give you a short intro to the company, then we'll walk you through the financial numbers, and then we will discuss our way forward and outlook for a few minutes. So Enea is here to make the world's communications safer and more efficient. And we're backing that statement up with a world-class portfolio in telecoms and cybersecurity. Telecom has not been the greatest place to do business in for the last couple of years, but I would say that that's not really a fair description of how it is to work in telecoms. First of all, during the last decades, there's been enormous investments in telecoms. There's been enormous innovation in telecoms, and it's really the foundation for the way we're living our lives today. Without telecoms, there wouldn't be hybrid work policy in many companies. You wouldn't be able to remotely connect to your house, to your car, to your bank. And you wouldn't be able to the type of online activities that you're doing elsewhere either. So telecom is really an exciting place to be, and it is the foundation for the life we're living today. What is though more and more clear to companies, to regulators and also so to the people living in this society is the security aspects. You're literally giving details about your car, shipping them online on your -- about your house, your security system, your bank details. And unfortunately, this is also since many years now, but it is accelerating, being understood by people with less good intent. So the security aspect is really booming, and Enea is placed not only in the accelerating mobile traffic in the Internet, but we're also in the midst of the security aspects of making the communication safer. We have a year behind us that has been pretty tough on Enea. A lot of great things have happened, but it's been a tough year for us, for our shareholders. And when a large project was canceled in Q2 last year, at the end of Q2, we had to make a plus SEK 0.5 billion write-down -- noncash impacting write-down. And that's what's carrying forward for the year into a negative EPS. But besides that, the EPS is now positive and has been so for all the other 3 quarters of 2023, but it's not only positive, we actually operated with a 38% EBITDA margin, adjusted EBITDA margin in the fourth quarter. And for the full year, we operated on a 34% adjusted EBITDA margin, which is very close to our long-term goal of north of 35% EBITDA margin. And this on the sales that wasn't stunning. We had a 2% decline on the full year numbers. So it's not sales driving our profitability. But not only are we generating high EBIT margins, we are also generating very strong cash flows. In the quarter, we generated -- sorry, for the full year, we generated SEK 259 million of cash flow. That's more than our EBITDA result. That's north of 25% of our total revenues. So the cash flow is very strong. We have a strong business model. We have 79% gross margin, 35%-ish EBITDA margin, and we generate a lot of cash flow. And we invest a lot in R&D. So during 2023, we invested 25% in R&D. So we will continue to do that, and it is a strong company that you're looking at. With that, I would like to hand over to Ulf for the financial numbers.

Thank you. So for quarter 4, last year, net sales ended up SEK 241 million and compared to last year, which was EUR 271 million. It's a 12% growth over Q3 last year but an 11% decline over Q4 2022. The total revenues for the quarter was SEK 243 million compared to SEK 273 million, including currency gains. And the currency impact last year for the quarter was SEK 4.6 million. Full year, we reached SEK 913 million compared to SEK 928 million for 2022, which is minus 2% growth. Looking into the segment. Network Solutions, we have a strong recurring revenue growth over the year. The license revenues increased compared to previous quarters in 2023, reached SEK 88 million in quarter 4. Compared to quarter 4 last year, we had a 17% decline. Support and maintenance reached SEK 72 million compared to last year SEK 67 million, which is an increase of 6%. And this actually concludes 3 consecutive years of stable growth within the support and maintenance category. Professional service increase compared to previous years -- previous quarters in 2023. And looking as a comparison with quarter 2 last year, we had SEK 53 million compared to EUR 64 million, which is 17% decline. Over to the other segment we are reporting on operating systems. We have solid numbers as predicted, and the expected drop in license revenues amounts to minus [indiscernible] from SEK 21 million to SEK 15 million. We have still a good support and maintenance revenues on a stable level of SEK 12 million compared to SEK 11 million last year, which is an increase of 4%. And we have a small part, which relates to professional service at SEK 1 million compared to last year. So going to the EBITDA development. In the quarter, we reached 38%, which is in line with the previous quarter for previous year. We had nonrecurring items in Q4 affected EBITDA with SEK 4.3 million. On the gross margin, we reached 79% compared to 76.4%, which is a positive impact of 2.6 units -- percentage units and related to reduced cost of sales items. The operational expenses in total was SEK [ 144 ] million compared to SEK 150 million last year, and that's related to operating expenses with -- excluding depreciation and amortizations to SEK 100 million compared to SEK 105 million last year. And the explanation of that is that the decreasing the capitalization of R&D costs, but we have, at the same time, reduced R&D spend with approximately SEK 18 million over the quarter. That takes us to the EBITDA less CapEx calculation. And we reached SEK 73.4 million in the quarter. And compared to last year quarter 4, we have an increase compared to SEK 71.5 million. And this is the effect of the efficiency programs that we have performed over the year, and this results in a better EBITDA less CapEx measurement. Over the year, for the full year, we reached EUR 220 million almost compared to SEK 195 million last year, which corresponds to 24% EBITDA less CapEx margin compared to SEK 21 million last year. EBIT reached SEK 47 million compared to SEK 57 million last year or a 20% margin compared to 21%. The EPS earnings per share reached SEK 0.6 compared to SEK 1.81 for the last year. Looking at cash flows for the quarter. Cash flow before changes in working capital amounted to SEK 53 million compared to SEK 70 million last year. And that turns out into operational cash flow minus SEK 24 million for the quarter compared to minus SEK 2 million last year. We had investments of SEK 21 million compared to SEK 34 million last year. This results in a net cash flow for the quarter of EUR 56.8 million (sic) [ minus EUR 56.8 million ] compared to minus SEK 35 million last year. The cash flow generated over the year have taken us to interest-bearing bank loans to SEK 470 million compared to SEK 551 million for a year ago. And the cash and cash equivalents were amounted to SEK 261 million this year and SEK 231 million last year. This results in a net debt of SEK 209 million compared to SEK 320 million. So we have reduced our debt with approximately SEK 120 million over 12 months. Equity ratio was 65% compared to 69% last year, and the net debt to EBITDA was SEK 0.97 million compared to top SEK 1.10 million last year. All in all, the cash flow generated over the year and also the cash position have led to the Board taking a decision that we will repeat the buyback program starting tomorrow, running to the next quarter report. Looking at the program in 2023, we purchased 570,000 shares to an amount of SEK 27 million. And this new decision will be within the 10% mandate that was given by the AGM last year. And also, the program will be carried out by a credit institution following the safe harbor regulation.

Thank you, Ulf. We'll come back to questions after the presentation. Now I wanted to discuss the -- our way forward here. And when you look at Enea, you need to think a global company. We have operations on the West Coast of the U.S., in Canada, in Latin America, in North Europe, Southern Europe, North Africa, South Africa, Middle East and Asia Pacific. We do a lot of things. We won 12 new logos during last year. And actually, if you would add some of the wins, we did through partners, we had won 15 new logos in the telecom industry during 2023. So we're winning, and we're winning business on a global scale with high margins. Our gross margin was 79%. Our EBITDA margin was 34%. And based -- from, rather, these margins, we are generating strong cash flows. The cash flow for the full year '23 is up a little less than SEK 100 million over full year '22, the operating cash flow, and it's more than 25% of our revenues in 2023. So that's a good thing to go forward to. And that's also what we're building our strategy on for 2024. Going forward, we're building plants on solid grounds. We have a strong business model with great leverage. We have great products in the portfolio, winning products and what works for us is grouping these products in business group. So the business groups or, if we call, 23 business units is what works the best for us, and we'll focus on that also in 2024. During 2023 and 2022, working on an international market is still so that we can't be everywhere. We can't bid on every project. And during '24, we will focus more on win rates, i.e., winning the projects we're bidding for, and with that, also to try to improve our predictability. Equally important going into next year is simplification by not bidding on everything. We're making life in the organization more simple. By focusing the organization, we're strengthening our efforts and chances to win, so it is things that are very much in sync here. So performance, simplification and also artificial intelligence will be very important for us in 2024 and going forward. Artificial intelligence, not only part of our products but also used within our organization to simplify life and to speed up the out -- or what we are producing within the company. And we are going to establish what we have during the last year. We want to strengthen that position in the security space and find growth within the telecom industry in that security area. But what our efforts in 2024 and from an investment perspective and from a shareholder perspective, you should appreciate that what we're doing is really based on the portfolio we have. To simplify this portfolio a bit, we can group it in 4 areas for plain fields, traffic management, embedded security, network security, and service provider Wi-Fi and data management applications. So within the traffic management space, we are going to expand what we have today, which is very much optimizing and accelerating video and also expand this portfolio into DPI or Deep Packet Inspection from a telecom perspective and monetization so that the operators with our product, with traffic management, you can help operators to better monetize traffic to make sure that calls are ended in the right way, that you're getting paid for them in the right way and to manage the traffic from that perspective. For us, this opens a market bigger than the video optimization and video acceleration market. So it's a very important step for us. I want to lead you to the far right bottom corner here of the slide where we're saying we're expanding our DPI solution. This is the part of Enea or this is a product that we're not selling to the telecoms industry. We're selling it to enterprises, to hyperscalers, to the defense industry. And here, we're moving up the value chain to also add an application that you on top of our DPI engine can detect threat or detect intrusion. So we're adding another revenue opportunity for the company while moving or expanding the product in this direction. We are using our own DPI engine, the embedded security product. It's the Qosmos ixEngine, the product is called, in our traffic management solution. And here, we are now starting -- we started already last year, joint product to use AI to be able to future-proof these 2 products when and if the traffic in the networks becomes fully encrypted. Today, we can identify 4,000 different types of traffic but there are trends to further encrypt traffic, and we try to stay ahead of this using AI. Our network security portfolio will expand from a pure signaling firewall to better address voice fraud protection, better address spoof calling. And also in the messaging side, where we have a messaging firewall, we will use AI to enhance the functionality and the detection of unusual traffic or unusual messaging in the networks. The service provider, Wi-Fi and the data management products here, we have our UDR, our Stratum product. 2024, 2025 is the time where we're going to expand production usage of our UDR product. And on the other data management products, we're going to try to find better ways of cooperating with a pretty large partner network we have around the world, where other companies are taking our products to market. So in '24, '25, there are significant opportunities within the portfolio we have, and we will continue to invest significant amount of money to expand products in the direction I just described. This portfolio is also the way we're going to segment our revenues for the investor community from Q1 and onwards. So we will divide our revenues on the network side and on the security side and thirdly, on the over side. So you can argue this is just a change of the telecom segment. And to some extent, it's right. But it's -- from another perspective, it's not correct. You should instead look at this coming from the product portfolio we have and the way we're doing business and the different aspects in these different segments. This is also how we organize our company in 2024. So we have a new organization. It's not a dramatic change, but it is a change, and I want to highlight a few things. First of all, the business group that owns product development and owns sales of these products, they are also grouped according to the product portfolio and the revenue segmentation I just discussed. And here, we have some wonderful mix of people with vast experience from the different segments, John Hughes, working out of our Dublin office. He has 17 years of experience within network security. Jean-Pierre Coury, working out of our Paris office. He has 15-plus years' experience within embedded security. And Roland, working out of our Vienna office, has a decade of experience from telecom companies, both bigger and smaller companies. So it's a very seasoned group of people, that's been with us for a long time, which is I'm also very happy for. We're forming 2 corporate operations, and that is to make sure that we use the same processes, and we're learning between the different business groups. Here, we have a woman called Emma Bergvall, has been with us for a couple of years, taking a lot of sales operations experience from other companies to Enea. And we have Osvaldo, has been with us also for, I would say, 3 years now, who's taking vast experience from one of the largest and most successful telecom companies in the world to Enea. Osvaldo is also appointed Chief Technology and Product Officer, which is a new role. I had it before when I worked as a CEO in this company. And for a technology company like Enea, I find that super important, and I think that Osvaldo is very much the right person to do this very challenging job. And then Anna and Stephanie has also been with us for a couple of years. They are staying in their roles. And Ulf, who I'm sitting with here in this meeting, has been with Enea for now 4-ish some years, but has been in the industry and with the product portfolio is coming with for almost 20 years. So the combination of new blood and vast experience is what makes this team very strong. If you want to join the team, we have recruitments ongoing. You can contact our people and culture organization. I think the new values we are implementing in the organization is not there only to attract new recruits, but it's also very much to drive business growth. As I said before, we have an organization, we have an individual sitting in San Diego. We have another couple of individuals in Mexico City, in Dubai and in Singapore as well as in Tokyo. And to run this type of global organization in this space, it needs to be value driven. And if -- you need to appreciate that customer focusing in what we're doing, quality in our processes, quality in our products is not something we can just talk about in these types of calls or in head office, it needs to be in the everyday work of our individuals around the globe as well as taking a responsibility for what we're doing and taking action even if you can't find the exact black/white clarity. You need to be able to take action in the gray zone. Traveling around the Enea organization is like walking in the Olympic Village. I haven't walked in the Olympic Village myself, but my brother did and a couple of my friends have done that, and they're also talking about the unbelievable sight when you go into the village seeing people of all kinds -- from all kinds of the world, from all corners of the world together in this village taking care -- taking part in the games. If you travel around Enea, you will find the same. As I said before, it's an international company with people from all corners of the world. What unites them is the fact that they are super capable in the cybersecurity and telecom space, and we share the vision of making the world's communication safer and more efficient. Our long-term ambition is unchanged. We are focusing on generating double-digit organic growth in our focus business areas. We're -- our goal is to continue to operate on high EBITDA margin, and our long-term ambition is to generate over 35% EBITDA margin. And clearly, we want to generate strong cash flows. And with the business model we have and the scalability we have, we feel confident about that. That's also why we're going into this year even though we are not immune to the general macroeconomic environment. We're not immune to the fact that our customers are careful with their investments. We still think that we will generate strong cash flows, and we still think that we will generate EBITDA margins above 30% for the full year 2024. With that, I would like to say thank you and open up for questions.

[Operator Instructions] The next question comes from Jesper Von Koch from Redeye.

Congrats to a strong quarter. And also, I appreciate very, very much the new kind of segmentation on the product lines. I think it makes the story of Enea a much clearer. All right. So starting with the outlook for 2024, I mean, [indiscernible] EBITDA margin exceeding 30%, but could you say something about top line? I guess like the large one-off license deal in operating systems, of course, make like growth more difficult, but if you could just give some flavor.

Yes. So there's a reason -- thank you Jesper and thank you for your kind words. There is a reason we're not mentioning top line in our outlook for 2024. So -- and the reason is that we really can't look that far into the future. There are signs in the industry. There are signs that things are lightening up a bit. We have a strong pipeline. I've talked about that since I met you the first time. We have a very strong pipeline. We're working hard on validating that pipeline in the last 2 quarters. And my first 2 quarters during this period as CEO has been good from the perspective that we've been able to hit the quarters, but improvements need to happen from the perspective we need to grow over last year. And that's the same thing going into 2024. We have a very strong pipeline. I find it difficult to trust that pipeline because there is a lot of things that haven't materialized over the last couple of quarter. And I'm talking not 2 quarters, I'm talking about the last couple of 8, 12, 16 quarters. So I can't really give you more flavor on this, but you've seen 2 quarters of Enea. It has been a flattish, slightly negative growth over the same period since '22. You see how our peers are working in the industry, but we're winning. We have a good portfolio. And if things are easing up a bit in the market, we might not be as careful as we are now with top line guidance.

Okay. Sounds good. And -- but then like considering that you maintain a very strict margin guidance, I guess you will like manage costs accordingly. Is that correct?

So we have taken out SEK 60 million cash cost over the last 12 months. So the cash -- the cost of the company going into 2023 is SEK 60-plus million less than going into 2022 even though we have increased this in our cost base due to inflation and people needing to have some kind of salary revision in this type of environment. So even with that included, we have SEK 60 million less cost going into 2023 compared to 2022. In the end of Q4, we rightsized and did some changes in our sales organization, but I feel very good with the cost base we have today, and we will obviously manage cost. But there is, at this point, no such plan during 2024, is that the plans in 2024 is to take in the business, win the business and grow the margins based on that. But it's too early to guide you on top line.

All right. I understand that. And then just a small one on the gross margin. I mean strong gross margin up 79% despite lower sales and new super high-margin license sales. Is there anything like noteworthy to take into account like going into the coming quarters?

You want to take that, Ulf?

There has been some changes in the service organization to make -- or we have made some efficiency programs in the category. Also, we are working on cost of sales for different product segment on deliveries. So we foresee that we will have an improved or a good level of gross margin for 2024.

Okay. So does that mean that -- I mean, your cost savings that you've already made and announced and so on, they do not only affect OpEx and CapEx, but they also affect COGS? Is that correct?

Yes, that's correct.

All right, good. And then a bit about the expansion of DPI into monetization for operators, how far or close is that? I mean is there any additional developments needed like the same customers and the same decision-makers that you already are in contact with? Yes, if you could just like expand on how easy or hard you think this will be?

So what we're doing is we're expanding the DPI offering on top of our traffic management platform. So it's another use case. And it's a significant investment for us. It's a significant opportunity that is opening up, and you will know and we can talk about that afterwards, but the 2 market -- the 2 competitors we have in this space. So it's actually so that we during -- we started this journey, if you wish, second half of last year. We have already won some customers. We have a back to the pipeline, again. We have a pretty strong pipeline of another with -- also new customers, so it's actually new logos that we're winning, and we're unseating competition. And in some cases, in parts of the developing world, it's actually new types of wins with -- based on regulatory requirements. We have released what we call the ready for tender so the product can be tendered. The product can be offered to customers, but the general availability and the delivery of these products will go into the second half of 2024. So this will be part of our product development investment during 2024.

All right. Great. And then just one last about -- like if you see or like expect any upcoming impact from like the rollout of Open RAN, I mean, of course, referring to the large deal from December with AT&T.

It's nothing that impacts us directly. Indirectly, of course, it's -- you can argue it has impact, but there is no direct impact on us.

The next question comes from Simon Granath from ABGSC.

So initially, we know that the telecom industry has been weak for quite some time now. Are you seeing any change in market sentiment that we are now entering 2024? Or is it more so the same?

Thank you, and thank you for your question. The -- as I said, we're -- the sentiment in the telecom industry is partly -- it's 1 part the telecom industry, and it's another part the general macroeconomic environment and political environment. And as I said to the -- before, I think today, for us, it's too early to give guidance on top line. We have a strong pipeline. We have good conversations. But for sure, we also need to take these conversations to closure and actually do business. And if you read the reports from any of our customers, it's not so that they think that -- or argue that they will increase CapEx over the last -- over 2024 -- 2024 over 2023. That's not what we're seeing in big picture. But when we talk about security, there is a lot of security initiatives in the industry. So within telecoms, I would argue that's a better place than many others. And also, what we're doing with our products now is that we're not -- it's not only telecoms infrastructure, it's actually monetizing initiatives, using our products to help better grow revenues from our customers' perspective. And those types of conversations are always easier to have than just selling technology.

Very good. And I believe that last year, you published some data on your traffic management solutions, saying that you are able to save costs through energy efficiencies for your customers. Are you seeing any traction relating to that?

Unfortunately, we're seeing some traction, but little -- not as much traction as we might would have hoped. Also energy prices that were rocketing a year ago might not be as high up on the agenda today, as it was a year ago. But sure, saving energy -- the traffic management solution of Enea is -- it's a very, very, very interesting product for many aspects. First of all, it can drive revenues by accelerating video content in the network. It reduces costs by optimizing video traffic in the network. It reduces cost by saving energy in the network as you argue yourself. As you said, we showed some numbers on that a year ago. And now we can also use the same platform with a different use case to drive monetization through our DPI offering. So it is something that works very well for us and the earlier question was if it's the same customer, the same buyer. It's not always the same customer and the same buyer, but it's very often a land and expand strategy, where we come in at one site and then try to expand within that customer on other site -- in other countries with different people. So the energy saving initiatives might not have generated as much business as we expected, but building the different use cases on top of traffic management is clearly generating a very healthy pipeline for that product.

Finally, I believe you said that the cybersecurity aspects of the industry are really booming right now throughout the presentation. And although we currently do not have the details on your cybersecurity-related revenues, could you talk about your current momentum here? Perhaps it is already performing well. But if not so, what is required to really move the needle on the group perspective looking at?

That's -- thank you, Simon, that's a very, very good question, and something we're actually working quite hard on as we speak and have been for the last couple of quarters. It's something that Osvaldo and his technical team are working very hard on. It's an area where we're working hard to try to implement and make use of artificial intelligence. So what I'm trying to say here, and what I've been trying to say throughout the presentation, is that, that area is very much booming from an interest perspective and from an appreciation perspective. And there are many customers of ours that have initiatives here, but it's also something that's been regulated for quite some time. So it's not a greenfield operation in many countries in the world. It's a brownfield operation where it's about replacing existing software, existing solutions with new. And here, I think you need to take cybersecurity within the telecom business [indiscernible] where you're actually moving beyond what's regulated and moving into what, for example, the banks are doing today when they are checking the usage of your credit card beyond what's regulated. They're actually working on top of and investing in activities on top of regulations to try to secure their customers. That needs to happen within the telecom industry as well. And so for us, we actually had a stronger top line year in this business 2022 than we had 2023. We won a couple of very significant deals Q2 '22 and Q4 '22 that we haven't repeated in 2023. These are customers. These customers are part of the growing recurring revenue base, but that spike that is required to grow over the same period last year has not happened in that space during 2023. The other aspect of security is, what we call, embedded securities. And here, we're selling outside the telecoms industry. We're selling into hyperscalers, into the defense industry. And we're selling the DPI engine to build security solutions on top. So it's an SDK, software development kit, where our customers are building solutions on top of that. And here, as I said before, we are now also taking the next step and adding an application of our own, threat detection application, on top of that engine that we're also selling, and we actually sold it both into a telecom subsidiary as well as into a hyperscaler during 2023. And here, we have a great 2023 with growth, and we're looking forward to another great year in 2024, focused mainly outside the telecoms industry.

There are no more questions from the telephones at this time. So I hand the conference back to the speakers for any written questions.

So we have a written question here, and that's -- the question is in Swedish, but it's asking how we're looking at our current investment level and if it's sustainable long term. And it's also a question if we're building a debt on the support side? And if we can manage that from a functional perspective long term? If I understand this question correctly, I will try to -- or I will try to answer it, and I hope I understand it correctly. So our current investment level, we certainly think that, that's sustainable long term. We are in an industry where innovation is important. And we're not innovating, meaning our R&D investment is not necessarily only trying to find the new things, it's improving and strengthening the products we have. So I think it's a very sustainable level going forward. I don't think we're creating a problem on the support side. On the contrary, it's not a financial strain at all, it's rather a very good business, and the support contracts with our customers, we are very important both to our customers. That is, for example, the functionality in our DPI engine live because the identification of the traffic is changing. So you need to update your software to have it detecting today's traffic and keep the product and the technologies up to date. So that's very important for the customer. And it's also a very good news for us because having these types of customer contracts, we can make sure that products are up-to-date, are competitive and we can win new business. All right.

No more questions.

Thank you for that. There are no more questions. So with this, myself and Ulf would again like to thank you for this opportunity and wishing you all a good day.