Frequentis AG (FQT) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. Welcome, and thank you for joining the Frequentis Half Year 2023 Results Call. [Operator Instructions] And I would now like to turn the conference over to Stefan Marin. Please go ahead.

Thank you, Nathalie. Ladies and gentlemen, a warm welcome from our headquarters in Vienna. Thank you for taking the time to dial in today. With me are Norbert Haslacher, CEO; Monika Haselbacher, Chief Operating Officer; and Peter Skerlan, CFO; Hermann Mattanovich, our Chief Technical Officer, is on a business trip. Let's start with the presentation numbers on the first half of 2023.

Yes. Thank you, Stefan, and also from our side a warm welcome, and thank you for being interested in our conference call today. We have a team including Frequentis's 2,200 employees. Very satisfied with our results. Now we are on the right track to continue to grow the company in a sustainable and profitable manner. I would like to start the presentation now on Slide #2. So, thanks to our good product portfolio, but also strong demand and our committed sales teams, we were able to increase order intake significantly by almost at 1/3, so 29% to be precise. Orders on hand increased by 9.8%, revenue by a very impressive 11.7%, almost purely organic. Due to the various projects and the long-time horizon of project execution, we cannot quantify how much is inflation related. New offers are naturally calculated using current prices. In total, EBITDA came in at EUR 8.2 million and EBIT was minus EUR 0.3 million, exhibiting the traditional seasonality in the first half of the year. The equity ratio was 40% at the end of June 2023, almost unchanged compared to the end of June 2022. At the end of June 2023, we have a net cash position of EUR 75.1 million, including EUR 51.0 million from the grant payments from customers. And all acquisitions in this year were paid for in cash. Slide #3, you see the order intake jumped by 29% to EUR 208 million in the first half year. ATM was plus with [ 13% ] and PST was plus with 73%. I will come to that explanation a little bit later. So, 1 major order in ATM which I'd like to share is from United States. Under the Federal Aviation Administration called FAA contract, Frequentis work together with the Telco provider, Verizon, to transition the whole U.S. National Airspace System to a modern IT network. The so-called FENS program will update the FAA's entire telecommunications network across the United States. The prime contract was awarded to Verizon, with Frequentis supporting all phases of this multiyear program. The significant drive at PST is supported by major orders won in the first half 2023 from the Police in Lower Saxony, the French railways and for fire brigade control centers in Bavaria. One word on the order from the French railways. Frequentis developed a customized communication solution for GSM-R and public mobile networks, driving railway performance through innovation. We are happy to support the digitalization of the French whole rail network in France and up to 40,000 mobile users in that multiyear program. Please note that especially major orders with multiyear programs are gaining profitability over time only, hence lower profitability in the beginning of this project is normal. The book-to-bill ratio of [ 1.1 ] shows the good development of order intake. This was possible because we followed our strategy of becoming a leader in all regions. We introduced new products to the market step-by-step in different regions and new products are either developed in-house or acquired through M&A. The increased product portfolio enables us to address more and more of the annual EUR 13 billion control center market worldwide. Our growth path was, and is supported by mega [ trends ] [ in ] mobility and security. There is increasing global demand for mobility with different -- differences -- with region differences. Security, of course, is a top priority everywhere. The order intake speaks for itself. Looking forward, we have a well-filled order pipeline and good opportunities for 2023, and as well for beyond. For more financial details, I would like to hand over to Peter Skerlan, our CFO.

Thank you, Norbert. Hello from me as well. Let's now switch to Slide #4. Orders on hand increased by 10%, up to EUR 547 million compared with 2022. Therefore, they remained above EUR 0.5 billion. Revenues were up 12%. This demonstrates the scalability and robustness of our business model. The segment split was almost unchanged. About 2/3 came from ATM and 1/3 from -- obviously it came [ from ] transport. The regional split was led by Europe, which generated a little more than 2/3 of revenues, followed by the Americas with 14%, Asia with 10%, and Australia Pacific, Africa with 8%, almost unchanged compared with previous periods. For EBITDA and EBIT, please let's switch to Slide #5. As usual, in the first half, EBIT is slightly negative, because of -- materials and purchase services was up 12%, and personnel expenses were up 10%. Other operating expenses increased by EUR 7 million or 32%. This was mainly due to higher project provisions, increased trail costs, exchange rate differences and higher energy costs and license fees for our own used -- released software. For details concerning our recent acquisitions, I would like to hand over to Norbert.

Thank you, Peter. I would like to show you Slide #6 now. So Slide #6 shows that since the IPO in May 2019, Frequentis has made 9 acquisitions. The proactive search for interesting M&A opportunities is since then part of our strategy for the whole company. In acquisitions, we focus on parameters such as expansion of the product portfolio, access to new markets and profitable business models. For important technology or product development, we also take make-or-buy decisions, as was the case in the last 2 acquisitions. Let me outline our 2 most recent acquisitions. They were small, but important to broaden our product portfolio. I have more details on Slide #7. So concerning GuardREC, the acquisition of GuardREC ATC was a classical make-or-buy decision. We decided for this acquisition with an eye on time to market and the features that our Norwegian colleagues have developed. Hence, the focus on this acquisition was on the product and technology offers. The total serviceable addressable share of the global recorder market is about EUR 140 million per year. We see growth potential on best technology baseline in the area of [ switch ] [indiscernible] and analytics segment of the recorder market. The other one is FRAFOS. FRAFOS brings a lot to the table in terms of further strengthening our product security competence. We will implement these components into all offers where relevant and sell them to customers in the safety critical domain. As always, we use a soft integration approach with smaller companies. We are satisfied with the way the acquisitions are being integrated into the Frequentis family and our product portfolio. In total, we invested about EUR 7 million for these 2 acquisitions. I would like to conclude with last Slide #8 with the outlook and our agenda for 2023. Based on more than EUR 0.5 billion of orders on hand, we have a good level of capacity utilization. In the first half year, we made good progress towards the region of [ these ] goals to further increase in revenues and order intake and an EBIT margin in the range of about 6% to 8% over the full year. Profitability depends on several external factors in these continued uncertain times. Capital expenditure will be about EUR 10 million. R&D expenses are projected to be above the level of 2022. So overall, we are looking forward to another year of growth in the Frequentis Group. And we are now ready for your questions.

[Operator Instructions] And we have the first question from Daniel Grobjohann with BankM AG.

This is not Daniel. This is Roger Becker, BankM. I have 2 questions. The first is regarding the order intake. There is a huge growth in the order intake of 29.1%, congratulation for this. But my question is, if we did not, let's say, the 3 largest customers, what the cause in order intake would be -- it's just a question for getting a rough reading of the bulk cluster or maybe [ about ] risk? The second question is regarding your guidance, your outlook for the EBIT margin. Question, might be outlook be a bit too conservative. I think, if you look at the orders in hand, roughly about EUR 0.5 billion the order intake, plus 29% and so forth. And [indiscernible] with this question of -- that the guidance may be a bit too conservative, is the inflation topic. You mentioned at the beginning of your presentation that new contracts are based on current prices. So nevertheless, I would like to ask whether price increases could be advanced to customers [ with ] let's say, to hardware and/or services and even personnel costs, you mentioned price increase of personnel cost of 10%. What could we expect here?

I would like to answer the question around the order intake, and Peter then will answer your question about the bottom line EBIT margin. So concerning order intake, I think you have seen in the last years that we always have larger deals in our order intakes during the half year. So I wouldn't say that it's unusual that we have last year in our order intake. What we do is that some of those programs are 3 million [ digit ] programs. Nevertheless, we book only small tranches year-over-year to not take the risks that maybe a program will be stopped and we have to reduce them of course the order intake [ again ]. So to give you an example, for a 3-digit million program in the United States, we only took a small [ lump ] digits order intake value this first half year, same for France, same for Germany. So we are not slowing up the order intake with orders which are not 100% confirmed. Therefore, I would say it's a normal pattern and the 29% increase is really based on a very positive megatrend development in areas of security worldwide, and also a huge demand in the area of mobility, which is, of course, also coming from the new building plans on new infrastructure in Asia and also in the U.S. for civil ATM. Concerning the EBIT margin, Peter, do you want to add to that?

Yes. Your first statement was due to very high orders in hand, is there an increase in EBIT margin possible. I would like to remind you to the statement of order when [ he ] showed the order intake, that especially [ need to big ] orders or with multiyear programs gaining the profitability over the time and the profitability at the beginning of these projects is lower. We gave an outlook concerning the EBIT margin that we expect for this year is 6% to 8%. As you mentioned, inflation rate is a big topic for us. What we have learned now is the inflation rate in Europe has decreased a little bit. We had very high inflation rates in the past. Now it's decreased down to 5%, but unfortunately, not in the countries where our [ results is ] confirmed. So we have still a very high inflation rate in Austria, in [ Croatia ], Romania. And also the inflation within Germany is higher than the rest of the Europe. So it's still a topic for us that we have to watch it carefully and it will have some impact on the result of [ this year ].

That makes absolutely sense that your statement that the initial margin will be -- so I mean the guidance is for this year, only 6% to 8%. So I take the message that the EBIT margin may increase once those projects have plans in the [ states ]?

Yes.

The next question is from the line of Teresa Schinwald with Raiffeisen Bank International.

I've got 3 questions. First one on one detail in the P&L that sparked my interest, it's higher share on work capitalized and some leasing or capitalizing equipment, infrastructure that will be lead to customers. Could you elaborate a bit more on that? Is this new? Is it exceptional? Can we expect similar levels in the coming quarters? And is this a kind of delivery model that is expected to grow? The second one is on RMB, which you already announced that it would be higher. Could you please quantify how much was already effective? The first half results and what share of revenues that accounted for? And the third one is on the remote tower business that hopefully would price -- you mentioned that it's going strong. Could you tell us at bit more on that still, on same revenues, profitability development and the current growth?

Peter, if you can take the second question?

I will start to answer the first and the second question, and then probably you can comment on them. Okay. Let's do it in order. I would like to comment on the first question that was the lease equipment. What we have expected during the past years that probably the day will come where the customers don't want any more to possess the systems. They only want to use it and pay, say based on the monthly fee or yearly fee, annual fee. But the increased rates were very low in the past and customers had always a better opportunity to refinance themselves at a very low rate. So whenever we discuss it, it made up into a contract, but it changed last year when customers asked for a lease model because the customer has 2 different budgets, the CapEx and the OpEx budgets. And then the OpEx budget displayed, so the customer decided to go for the lease model. If it's -- and also the future, I don't know. That depends if the customers have lack of funds, because in the past, it was always their advantage to procure service -- the systems. Concerning R&D, normally the R&D costs are the same over the whole year as the people work on and produce IT expenses, but refinancing of cost due to customer projects is normally higher in the second half of the year. The third question was concerning remote tower. Norbert?

I mean, we do not -- still do not -- the business is not big enough to have our own profit [ employed ] under remote tower revenue and margin development. I think you have seen in the last couple of months that Frequentis has won large contracts in France, in Australia and also in the U.S. about remote tower. Taking in mind that -- have in mind that developments -- that the approval took us 8 years, I think we still need another 2 years to be really cautious, or conscious about the development of that product. So that's our position [indiscernible].

The next question is from the line of Christophe [indiscernible].

Yes, I have 2 questions. First, on the increase in provisions. You mentioned a specific project. Can you provide some details on this project? And do you see any further risks on this project? And the second question is on your profitability in air traffic management. Can you explain a little bit the development in the first half? Because I extrapolate your development for the full year, it seems as if ATM might be less profitable than the year 2018 when I look back into your history. Maybe you can provide some details on the profitability in ATM?

So, I would like to comment on it as follows. Concerning the provisions, we look upon each program that we have in-house, each ongoing project on a monthly base if there is enough funds from customer available to cover the residual costs of the project, and whenever is not enough coverage, we make provisions. That's a total normal [ progress ]. And in the first half year, we had to do a little bit more concerning 2 projects. Please understand that we don't want to mention customer or the project. The normal process, as we have always done in the past. We think that the -- sorry -- thank you. It's a normal process. We think that for these 2 projects, there is enough progress for the future. Concerning profitability in ATM, there is still a lot to do in ATM. That's probably some outcomes of [ Corona ] where we have 2 entities reduced order intake, has to cover them and improve, which shall be possible then during the next periods.

The next question is from the line of Miro Zuzak with JMS Invest.

Congratulations for the order intake and the top line results, well done. I have a couple. I will take them one by one, if it's okay. The first one is a question regarding the split of EBIT over the 2 segments. So I was a bit astonished -- I mean the overall minus 0.3% EBIT, let's say, in line with our typical seasonality, but the split between ATM and the services was a bit surprising. Can you please give more insight about why ATM is so negative and [indiscernible] so positive?

So you will ask all the questions one by one, okay. One thing that's concerning Public Safety & Transport, I think the product that we have on the market is a very mature product which meets customer requirements in a very good way, whereas in ATMs there is the new generation still developing. And concerning what we see in the transport, the effect that I mentioned concerning post-Corona isn't as sharp as we had it in ATM. And we'll try to manage to fix that within the next periods and to improve in ATM.

And Norbert, maybe I can add something to what we have discussed in sales on the [indiscernible] conference. ATM is now on the [ spot ] where we renew our hardware driven portfolio element in [indiscernible] to be replaced by the software [indiscernible]. That's a multimillion investment we are taking in ATM. And of course, this has a major impact to the profitability of ATM. But we did sustain [ profitability ] with LifeX, I think, 5, 6 years ago. I think we can see that it absolutely paid off. [indiscernible] is at the steady readiness level, 70%, approximately. So there are still this year and next year with less investment needs for transforming the hardware into software. And I think that's also a major impact pillar to our bottom line in ATM, which was expected and planned.

So it's also expected in the second half, I guess, if the product is not yet ready, so this will be similar in the second half in terms of difference between the 2 segments?

Yes.

Overall, I mean, if you look at seasonality, could you please just quickly remind me about what is being booked in the second half typically to make the semester so profitable? Because like you have now EUR 187 million of revenue in terms of turnover, that's the same like in H2 2021, but you posted a EUR 25 million profit in H2 2021, which is like EUR 25 million less than -- more than you posted in H1. So what is exactly driving this huge seasonality? It must be like -- it must be more of an accounting effect than an actual -- it must be more dependent on accounting than on actual customer take off? I hope you understand my question.

Of course, it's not the first time that we hear this question. So we are used to this question. So they have set all these -- but I would like to mention you one -- that we have a lot of costs which are -- fixed costs which are monthly in the same range as our turnover. [ Our ] revenues are higher in the second half of the year, especially in the fourth quarter. We made no revenues. Why is it higher, because there are a lot of efforts and milestones in the last quarter where also our subcontractors are going to allow us to regain those [indiscernible], and so we have done progress on our programs. Next thing is, there's a lot of investments have done, very little in the very late stage of the year where the decisions are made very late to the end of the year and a lot of premiums, separate and [ decisional ] payments from customers to us for change we [indiscernible] are then done in quarter 4 and customers realized that they have budget less. So these are most important reasons for a very tough quarter 4.

Then another one would be on the outlook. I mean, you don't give any part of this guidance there. You talked about [ further ] growth, which I think is obvious. But maybe you can give some qualitative remarks about the growth of the H2 revenues? So what we see is a huge uptick in order intake, we see strong top line development. Is there any reason why we should expect H2 growth to slow down versus H1?

No, we don't -- I think we follow the same pattern as we have shown in the last years. I know that you have a calculation of [ 40:60 ]. Maybe that's 43 to 57, something like that, but it's still the same pattern. But we see a lower top line and lower bottom line in the first half year and a higher bottom line and a higher top line in the second half year compared to the first half year. I think that's still valid.

Then I would have another one. You showed in the presentation all the acquisitions that you have made since the IPO. I mean, that's -- many of those -- I think 9, I can't -- question here. I mean, you typically integrate all these acquisitions and some of them are in the same space of voice communication, data communication and so on. I mean, how should I imagine your product portfolio now? Because, if you make 9 acquisitions, say, 3 of those in voice and data communications, then you at least have 3 product portfolios -- 3 different product portfolios. Maybe you have your own products before in your portfolio. Are we talking about 4 different products for -- which ones are you going to sell to your customer? Or is that a -- difficult for the customer to understand what [ entities ] -- as of today, there are so many different products within the organization. Can you please explain how you deal with that? I'm sure you're doing that very well, but how you deal with that and what the strategy is in this regard?

Yes. The question -- for answering that question, or anticipating, I think it's necessary to understand the safety critical control center market a bit. So let me elaborate one minute about the control center market. When you go into a control center where the operator of the fire brigade or the operator of police force, or even a military operator is sitting, then you usually have around 16 to 20 different applications being active on such a workplace. One or 2 are voice communication related and the others are data communication related like a radar picture, or surface movement controls this. They show based on data situation awareness to the operator. So between 16 and 20 different applications you will find such a control center. And in the military sector, they call it command-and-control systems. And this command-and-control systems, this market is around EUR 13 billion annually in the world's markets -- from a world market perspective. So what we have added to our portfolio is more and more applications for data communication and increasing iteration awareness for the tower. That's why we have acquired ATRiCS with the famous tower [ apps ], or Orthogon, which is optimizing the arrival management procedures when the flights started to defend to the upwards. So those are different applications we did not have. But you will find in every single ATM control center in the world, because you have to imagine a couple of years ago we only had 1 product in ATM, which was the voice communication system. That's one area where we have acquired companies, and I would say that's ATRiCS, with Orthogon and ATC Canada. In regular, we have acquired a command-and-control system because we only had a voice system by [ ATRiCS ]. And when you go into a police control center, you see 2 major applications. One is the voice from where they have already dispatching emergency [ co-taking ]. And the other one is the captive where you document the incident and allocate resources to the incident. That software package we didn't have. That's why we have bought regular because the market size of the [ CAP ] system worldwide is equal to the market size of the [ command ] system. And we can also now approach the market with an integrated [indiscernible] system, what we just have announced in the U.K. with our first win. So that's for public safety also adding an additional application, which is required in all control centers worldwide for incident management. And the last area, I mean, C4i -- I think I explained, C4i was the tactical acquisition. Yes, they also have the voice communication system for military view. But when you see that in the growth markets, the intention is that there are blocks created between the West and the East. So AUKUS, which is Australia, U.K. and the U.S. that builds a stronger collaboration block where major European entity is not accepted to deliver into these blocks anymore. That's why we acquired an Australian company with a high security clearance to be able to address the U.S. defense, Australian defense and U.K. defense market, which is by far the largest element of our addressable defense markets, which we cannot maybe address from Europe, especially not from Austria anymore in the future. That was a tactical acquisition. And GuardREC, FRAFOS have been acquisitions where we wanted to launch new products that we did together with our R&D departments. The evaluation of what would it cost in terms of time to market or in terms of R&D spending to create that product versus to buy products. And the opportunity we have in buying FRAFOS and GuardREC gave us the opportunity to save costs because it was much cheaper for us to buy the software and give us much more shorter time to market in comparison if we would have developed it ourselves. So that was a pure make-or-buy decision and a new technology we wanted to have because our current technology is outdated in the area of recording and we have not the capability in the cybersecurity area, which we added with FRAFOS to our portfolio. So I know it was a long answer. But I think it's important to understand our market mechanism. They are complex because they are political. And therefore, I think the acquisitions -- all of the acquisitions we have done, experts have been the right decision. And I think the order intake is showing also -- that we also organically position our portfolio very well in all our regions and the sales people have learned how to sell those products into our markets. I hope that answers your question.

One last one, personnel costs EUR 113.4 million. Was there any element of one-off costs involved? Or is this just the new level of your personnel costs going forward?

The increased cost consists of 2 things. One is the inflation, which put pressure on the payroll costs, and then we have also increased staff. There are no other [ one-time ] costs involved.

[Operator Instructions] Our next question is from the line of [indiscernible] with Siris Capital GmbH.

I would also ask my questions one by one. And my first question is to the topic you mentioned in the presentation and also in the [ QA ], about this ramp-up phases, if you get new projects to capture the full run rate in terms of margin? So how long should we cultivate these phases, that you get the orders and then there's some ramp-up phase until the project is fully running -- on a full margin pay?

Yes, I think well -- What's important to understand is that at the beginning, there is a tender where presented -- both the competitors try to gain the tender. And so it's still clear that for certain tenders of -- the cheapest is the winner. And then it depends on the time frame of the program, if it lasts 1 year, 5 years. The bigger of the program, the longer it lasts. And the question is then -- if you say, is been there an improvement, yes. But please be aware we want to grow further. So we will also win in the future new programs with a very low margin that's part of the business and improve it then over the lifetime of the project.

Then, in terms of your order entry and order book, you mentioned before that you have just booked a little part of these big orders in the order entry and order book. So can you give us a rough idea of how much orders you have already received but you did not book yet?

That's -- I think that's a question of methodology. All what I'm saying now is best guess because what we have in our order books -- in our orders on hand, which is more than EUR 500 million currently. Those orders are 100% committed by our customers. And if we win a framework contract -- in the U.S., for example, you -- it's called IDIQ contract. So it's in defined quantity and in defined delivery. So you don't know when you get the contract, how much million or hundreds of millions you will have because it's in defined delivery and in defined quantity. And that's what the U.S. contracts are. But what we book then is -- we know that's a $150 million program. But what we've booked is only the orders we get from the FAA, for example, for this specific share, which is now -- I think it was only EUR 3 million, EUR 4 million we have booked, and this is part of our orders on hand. So as soon as we get the fully signed, over 100% committed in our house -- on our desk, then we book this share into our orders on hand and order book. Can I tell you what's the overall volume? I can tell you that the overall volume of FAA, [ SCS ] in France and Bavaria is between EUR 250 million and EUR 300 million. [Technical Difficulty].

No, it's over years.

Over years.

And then my last question. We now show this very positive trend in order intake in the first half of the year. Do you see this at the beginning of the, let's say, trends that will also continue in the second half of the year? Or are there some projects which were shifted from previously planned second half of the year to the first half of the year? Or how do you see this general trend?

Yes. So first of all, our commitment is still valid that we see a higher order intake 2023 compared to the order intake 2022. So that's the first statement. Second statement, that's a little bit related to Miro's question before. We still see the same pattern we had in the last years that we have between 40%, 45% of orders in the first half year and the rest in the second half year as still being valid for 2023 as well. Of course, we see shifts into next year, but that's part of our daily management of our opportunities. So we usually have more opportunities than our annual plan. But we see the continuous growing demand on security solutions also for next year and the year after next year. So I think the trends are all good. Pipeline is good. And we expect higher order intake by the end of this year than compared to last year.

So far, there are no further questions. I hand back to Stefan Marin for closing comments.

Yes. Thank you very much for all your questions and for the time that you spent with us today. We will publish our full year results in April 2024. And yes, we look forward to meeting you at the commercial CSF conference in September in Frankfurt or the German Capital Forum in November. And in the meantime, please feel always free to drop in the line to arrange for an individual call. Thank you so much and have a good remaining summer throughout Europe and on the globe.

Ladies and gentlemen, the conference is now concluded and you may disconnect. Thank you very much for joining and have a pleasant day. Goodbye.