Frequentis AG (FQT) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and a warm welcome to today's earnings call of the Frequentis AG following the publication of the financial year 2024 figures. I am delighted to welcome CEO, Norbert Haslacher; CFO, Peter Skerlan; COO, Monika Haselbacher; and CTO, Karl Wannenmacher, who will speak in a moment and guide us through the presentation and the results. After the presentation, we will move on to a Q&A session in which you will be allowed to place your questions directly to the management. Having said this, I hand over to Frequentis Head of Investor Relations, Stefan Marin. Mr. Marin, the stage is yours.

Ladies and gentlemen, welcome, and thanks for joining us today. Following the release of the preliminary figures for 2024, we are happy to share the full set of figures with you today. All publications are available at frequentis.com/publications. And without further ado, Norbert, the stage is yours, please start with the presentation of the 2024 figures.

Thank you, Stefan, and a warm welcome from me, too. We look back with great pleasure and pride on what we have achieved in 2024. Such progress is only possible, thanks to the team effort of around 2,400 employees worldwide from Europe to Australia, from Asia to North and South America. For us, appreciation is a central component of our corporate culture. Each and every individual can, therefore, be proud of their contribution to this success. As you can see on Slide 2, order intake, orders on hand and revenues grew by double digits despite having to deal with the aftereffects of above average inflation in '22 and '23, especially with regard to salaries, we achieved EBIT of more than EUR 32 million and improved the EBIT margin to 6.7%. Order intake rose by an impressive 16% to EUR 584 million and orders on hand are up 22% at EUR 724 million. Revenues grew to EUR 480 million. Compared to '23, we made good progress with our EBIT profitability. EBIT was 20.5% higher at EUR 32.1 million. Net profit was EUR 23.5 million. In view of the net result, we are proposing another dividend increase of 12.5% to EUR 0.27 per share. Yes, at the end of December '24, we had a net cash position of EUR 82 million, EUR 41 million or 50% of this were from advanced payments from customers. And based on our healthy balance sheet, the equity ratio was at 44.3%. Slide #3, a little bit more on order intake, some selected highlights. So the highlights from both segments show that our innovation pays off. We are really proud of successes such as the advanced automated tower for Norway and the public safety network for 300,000 emergency responders, which we are building with IBM together in the U.K. and the LifeX solution for Malaysia and the new communication system for the Swiss Federal Railways. One thing that all these solutions have in common is that they are homegrown by Frequentis. Customer, Frequentis is here to make the world a safer place. So we support our customers to meet the mobility and security needs of modern societies. These needs drive our markets who grow with about 4% to 5% per year. And our evolutionary growth and enhanced profitability was driven by the resilient and stable business model as we are part of national safety-critical infrastructures of several countries. Then our focus on innovation, the continuous portfolio expansion and the advancement of safety-critical applications for control centers. This enabled us to grow faster than the market and group revenue grew by an average of 9.6% in the past 5 years. I want to mention at this point that the economic areas in which we operate have relatively low cyclical exposures. One short comment on the new U.S. tariffs. We have 3 sites in the U.S. and are seen as a U.S. company. So our products contain local expertise, so we do not see ourselves as being significantly affected by the tariffs. Due to the changed geopolitical situation, we expect to see increasing investments in military security, that is air traffic control and air defense in the coming years. So we do not expect an immediate jump in incoming orders and revenues. We have noticed that defense budgets are rising and starting to be allocated, but it's too early to quantify the effect. Procurement processes often take several years and investments are first made in military equipment, for example, in air defense systems before these are integrated into control centers via software solutions. In '24, military air traffic control accounted for around 20% of the Frequentis Group revenues. And as you can see in the box on the right, our defense business is a global one serving NATO and NATO-friendly countries. On Slide #5, we show that demand for our solutions is growing without interruption. So the book-to-bill ratio was 1.22. In 2024, order intake in both segments grew at a similar rate. At ATM, order intake grew by 15% to EUR 398 million, and PST showed an increase of 17% to EUR 186 million. Looking forward, we have a well-filled pipeline and opportunities for 2025. And as a growth company, our goal is to increase order intake again in 2025. Orders on hand were EUR 724 million as at the end of December '24, an increase of 22% versus year-end '23. That gives us a very good visibility into 2025 and beyond. More than half of the orders on hand will result in revenue recognition in '25. A word on the reporting of order intake. Some of the contracts we have with our customers are framework contracts. So in these cases, we only recognize the confirmed order value. The budgeted options in the frame contracts represent a value of approximately the same amount as the orders on hand. So that's about EUR 700 million in potential additional order volume. For more financial details, I would like to hand over to Peter Skerlan now who takes care of our finances.

Thanks, Norbert. A warm welcome from me as well. Now to Slide #6. Revenues were up 12.4% at EUR 480 million. This was the fourth time in a row that revenues showed double-digit growth. Our growth in 2024 was organic. Relative and absolute revenue growth in 2024 were higher in air traffic management, ATM in short, with an increase of 15.3% versus 6.1% for public safety and transport, public -- PST in short. Looking at PST, the ramp up and thus, revenue recognition of individual projects was slower in 2024, particularly for the major projects in the U.K., Malaysia and Switzerland. Large long-term projects require longer setup and development times before rollout begins. The segment split was almost unchanged. ATM share was 70% and PST was 30%. So next, Slide #7. Looking at revenues by region, Europe showed the highest absolute growth. Americas, that is North and South America, were the fastest-growing region in relative terms with growth of almost 30%. On a revenue split basis, our European home market remained strong and generated 62% of revenues, 4% points less than in 2023, followed by the Americas with 18%; Asia with 12%; and Australia/Pacific/Africa with 8%. I'm now at Slide #8, which is a good explanation of our business model. The pie chart on the left shows that 56% of revenues were generated by systems that are already installed for our customers. 41% came from new products and systems for our customers. These 2 figures fluctuate by plus/minus 5% to 10% over the years, depending on order intake and project progress. The pie chart on the right shows the revenue split by revenue type. It's an approximate split as customers order and buy complete systems, not individual project services, software or hardware. The split is unchanged compared with the previous year. More than 35% of revenues come from project services like the design or control center architecture, project execution and day-to-day project management. Next comes maintenance, which accounts for 30%, mostly recurring revenues. And the pure software part is about 20%, followed by hardware, which accounts for less than 10%. Let's have a look at Slide #9. This slide shows the constant revenue development for the group in both segments. The group's EBIT margin was 6.7%. As you can imagine, we are very happy with this development despite having invested EUR 30 million of EBIT into research and development. As you know, research and development is not capitalized, except for EUR 400,000 last year. And now a few words about the EBIT margin at ATM. We are continuing to invest in product development in ATM. We are focused on our newest release, X10, our MosaiX platform and the tower business. This is in line with our strategy of shifting our business model from hardware-centric to software-centric. Now let's look at the EBIT margin at Public Safety and Transport. The graph shows that the profitability of the PST segment outperformed that of the bigger ATM segment. PST continues to show that it is possible to achieve double-digit EBIT margins. PST's current EBIT margin is 10% and is project specific. It relates to initial investments for the big projects in the U.K., Malaysia and Switzerland. For more about our strategy going forward, I would like to hand over to Norbert.

Yes. Thanks, Peter. So Slide #10 shows the strategy of becoming #1 in control center solutions. So on the right-hand side, you can see that our current product portfolio can address a market of around EUR 3.2 billion. So the total global market for control room solutions, including equipment, is EUR 13.1 billion annually. And due to current market dynamics in safety and security, we are currently evaluating both figures and we'll share the outcome of our findings later this year. The strategy is based on 3 main points: R&D, new deployment models and M&A. So R&D results in new solutions and products that cater for the changing technology and user landscape our customers face. So drone management, that is the integration and defense against drones, critical communications such as mission-critical services known as MCX, systems supported by artificial intelligence and our work on the future of communications and tower infrastructure that can run in virtual and cloud environments. New deployment models like Cloud Solutions and Software-as-a-Service meet changing customer demands and are part of our strategy package. And our decision to acquire companies and interest in businesses that enhance our product portfolio has proven right. So take the emergency services program in the U.K., the contribution made by our colleagues at Nemergent in which we acquired a stake in 2020 was vital to enable us to partner with IBM. So the proactive search for interesting M&A opportunities remains part of our strategy. When making acquisitions, we focus on parameters such as expansion of the product portfolio, a profitable business model and a cultural fit and the acquisition price, of course. We will continue to look at which technologies and products we develop ourselves and which we buy in. So let me conclude on Slide #11 with the outlook for 2025. So the 2024 figures show that we delivered what we promised. We are doing our best to deliver again in 2025. So based on orders on hand worth EUR 724 million, we are working at a good capacity utilization level. More than half of the orders on hand will generate revenues in 2025, and we aim to increase order intake further. The sales pipeline is well filled for 2025 and beyond, we anticipate that revenues will grow by about 10%. Regarding profitability, inflation continues to be a topic. As a project-driven company, temporary shifts in milestones and therefore, revenues and the contribution margin are always possible, but we expect the EBIT margin will be about 6.5% to 7% in 2025. Capital expenditures will be about EUR 12 million and company funded that is self-financed R&D expenses were EUR 30 million in '24, and we expect them to remain at the same level. So we are looking forward to another year of growth in the Frequentis Group, and we are now ready for your questions.

And congratulations to your growth. [Operator Instructions] And we already received a hand up. Mr. Becker, you should be able to speak now.

I got 2 questions maybe to Mr. Skerlan. So the first question is in the PST segment, the EBIT margin went down from roughly 12% to 10%. Can you please give us an indication or a short explanation what is the reason behind this? And my second question is, you are reporting an impairment loss of around about EUR 2.6 million for business recording that is a subsidiary, I suppose in Germany or Austria, I'm not sure about this. What is the reason for this impairment loss? That's it.

Okay. Thank you, Mr. Becker. Thank you for the question. Concerning PST, we tried to point it out in our presentation. The point is that we have larger projects, which are in the ramp-up phase in 2024, and it needs some time to let the large projects ramped up and then we see the rollout phase where the margin can be improved. And concerning the second question, it's a cash-generating unit that was created for the recording business and according to this plan. Revenues were unfortunately not as high as we thought in the first year. So we were forced to depreciate this investment due to the fact that the plan was not achieved for this cash-generating unit as originally planned. But we still believe in this unit. But the market will probably need a little bit longer. Customers are convinced concerning the product. So we are sure that we find a good market for it, but unfortunately, not as quick as originally thought.

And we will go on with one more hand up, Nicole Winkler, stage is yours.

I have a follow-up question on the margin side, not on PST, but for ATM. What was then the reason for the higher margin? So has there been some one-off effects? Or is it purely project related?

Yes. Thank you for the question. We are a project -- our business is project business. So larger projects have always an effect on the margin. And in this case, we have done certain steps to improve the margin in ATM, and we are very happy it paid off at the end.

Okay. Understood. And another question regarding the U.S. tariffs. You were already mentioning with your 3 sites there that you should be -- not be significantly impacted. But can you be more precise and give us a percentage number how much is still imported from the EU to the U.S. to fulfill your projects there?

Yes, Nicole, I can answer that. So as I said, we have 3 subsidiaries in the U.S., one for the civil business. Last year, we created another entity for the defense business, which is a classified unit with a high security clearance. Only U.S. Americans are allowed to work for this company to address defense businesses in the U.S. The value chain we have localized to the U.S. many, many years ago, so around 80% -- 70% to 80% of the whole value chain is U.S. made by U.S. So we are seen as a U.S. company, not as a European company in that case. So the only thing we usually export to the U.S. is software licenses on which basis our solutions are built in the United States. Therefore, tariffs probably will only be applicable for the U.S. -- for the licenses we transfer to the U.S. But to be honest, every hour, we get a new message from the U.S. about news, about changes. So we are watching that continuously. But for current status, we are pretty much relaxed about that development.

Okay. That's good to hear in these times. And maybe last question from my side before stepping back into the line. The lower end of your guidance of the EBIT guidance would imply a decrease in the EBIT margin from 2024 levels to 2025 levels. I just want to understand what is baked in here? Is it increasing wages again because inflation came down significantly, but I'm not fully aware of the Austrian inflation, to be honest.

Yes. Thank you. I would like to answer to this question. Peter Skerlan here. It's -- I would say, it's the kind of uncertainty that we are faced at the moment. Also the effects that it probably has on the inflation rate and supply chain issues. These are now, I would say, very interesting times. So we are careful and don't promise what we cannot keep. So we think 6.5% to 7% is what we can promise and achieve.

And we will go on with Daniel Lion, you should be able to speak now.

Congrats to the good development. Actually, I would like to focus a little bit on the Ukraine topic. We've talked about the tariffs already in the U.S., but it got a little bit silent about potential end of the war. Do you see basically an end of the war for Frequentis negative, neutral or could it be even positive when building up new infrastructure? How do you view this topic?

Yes. We had the discussion a couple of months ago on an investment conference as well. So we don't think that the new normal that the Europeans and NATO has to build up their own national safety-critical infrastructure will be influenced by a potential end of the war in Ukraine. So we think that's a ship which has already left the harbor. And therefore, I mean, Germany has shown with their EUR 800 billion investment plan for infrastructure in Germany only that the budgets are reserved. The budgets now will be allocated into tenders. So we think that the trend will be independent from the situation in Ukraine. Ukraine itself, as we are not allowed to deploy any of our solutions to Ukraine during war, we are, of course, waiting for the end of this brutal war. And when Ukraine has some kind of peace, which allows Frequentis to deploy our solutions, we see an additional potential in building up Ukrainian infrastructure in all areas. That means in -- on water, on lands, in the air. So we expect an additional market segment coming to European countries and also to Frequentis as a potential opportunity for our solution.

Okay. Very interesting. And obviously, you mentioned the high investments into defense, especially in Europe as well. When we look at your defense revenues, they're rather flattish, obviously, because the topic is rather new. But would you expect also going forward to have like defense revenues at around 20%? Or do you think this is going to change?

Yes. I mean, as you said, our defense revenue is around 20%. Usually, it's a very high-margin business. So of course, we're interested to boost our defense business. And we have also decided end of last year to expand our defense-related portfolio. So we will go more into anti-drone software solutions to identify friendly from unfriendly drones. We have recently got a contract in Germany from the German armed forces and to, by an incident, engage counter drone measures. The other point is that we also expect that our solution for radar data distribution, what we have won in Germany will be shifted on a European level for European Sky Shield. So we think that the defense business will come up with additional opportunities in the next 3 to 5 years continuously. Of course, the other segments also show growth potential. So the question in terms of relative revenue share of the defense business compared to the others is not easy to predict because we also expect growth in ATM and PST. And we have to understand that the EUR 800 billion in Germany will, first of all, purchase equipment. And after that, the control centers will get their tenders because the equipment has to be integrated. So we don't see now a big wave in front of us or a massive hook the next year or the next 3 years, but we see a continuous growth in defense opportunities, and that's why we have extended our portfolio. If we end up at 25% or 30%, that very much depends also on the other segments, how good they will be developed over the next years.

Very clear. And then maybe a last one, a little bit housekeeping. So working capital ratio slightly up as also indicated or as I understood, was to be expected for this year. Do you expect that we have now reached already the ceiling in terms of working capital to sales and that we should be going down or slightly improving maybe and releasing some cash? Or should we expect, given the strong order intake and order book levels that this ratio could move up further?

Okay. I would like to answer to this question. Concerning the working capital, what you see is that it consists mainly of our inventories, inventories that are necessary to fulfill our long-term commitments for our warranty contracts. So I think that we have probably achieved here a kind of ceiling. Concerning our work in progress, I think we want to set further measures to optimize that by asking for more down payments, prefinancing through customers as well as meeting the milestones of our projects without postponements. But in both things, we are -- we depend on the customers. So these payment milestones have to be written like that in the tender. Otherwise, we can only bid. So we will try to optimize it where we can. But when it comes to a tender, it's very tough to negotiate it.

And we will move on with a question from our chat box. Mr. [indiscernible]. You mentioned that your R&D investments will be similar to last year in absolute level around EUR 30 million. Why don't you expect a higher EBIT margin given that the 10% top line growth should translate into operating leverage given that R&D expense is stable all else being equal?

Frequentis is a world market leader, and we are a technology-driven company. So we are also a family-owned business where we want to also take care that we are world market leader in the future. So investments into R&D are essential for future growth.

And we will go on with 2 more hands up. The person with the name user, you should be able to speak now and please introduce yourself with your name.

So sorry for that. My name is [ Matthias Vivero, ] I'm calling from [indiscernible]. I want to follow up on the question by the last analyst. More structurally, you run like EUR 30 million R&D expenses through your P&L. Is there -- at some stage, the 6% relative to sales in R&D, is this because you are like project-based in all eternity? Or is it as a ratio, R&D to sales, is that going to come off at some stage. I don't know your business, so maybe this is more like a basic question.

I think it also depends because where we have customer contracts where with high development, our wishlist also have to fulfill the customer requirements. And so it fluctuates also from 1 year to the next year. And that has also been taken into consideration.

But it's not like that this could halve at some steady state.

No. But I think -- so let's say, a decrease of 1% or an increase of 1%, that's something that could happen that is possible, but we don't want to reduce it sharply. We don't want to endanger our future.

And we have one more hand up. [ Thibault ] [indiscernible] you should be able to speak now.

It's regards to mostly capital allocation and M&A. Obviously, I get the rule that you need to keep in net cash position, the -- I think it's 10% or 15% of the revenue, I suppose. Can we have a sense of what is in the M&A pipeline right now and how much you're willing to spend? Basically, can we expect you to go into bigger deals as the group gets in scale? Or should we expect still to remain on small bolt-on acquisitions with technical expertise?

Yes. I will answer that question. So as I said, since our IPO in 2019, M&A is part of our corporate strategy, which it was not before. We acquired 10 companies since then. And I think we have learned how to do a post-merger integration process after acquisition. And what we have learned is that it's the same effort to acquire or integrate a small company than if we would acquire and integrate the bigger company because we have -- our spread is between a EUR 30 million business we have acquired from L3Harris 4 years ago and a small company with 10 people somewhere in Germany or 20 people 3 years ago. So I think we have learned how to integrate and that it's pretty much the same effort. So our focus now, I think, is a little bit more mature and bold that we accept to do a larger acquisition. So I think up to EUR 100 million additional revenue is a target which we could digest. The question is, is it available at the moment? We have around 25 to 30 teasers per year where we go into details if it fits to our strategy, to our software-centric business model and to our corporate culture. And we do that every year between 25 and 35 companies. Is there one already on the short list where we are in due diligence? No, there is not. But we have our eyes open, and we are pretty much looking forward to continue our M&A path we have started 6 years ago.

Okay. If I may just ask a follow-up question on that. And so considering the kind of -- I don't know if it's regulatory or if it's your policy to keep the net cash position as a percentage of revenue. How should we see the financing of such a large acquisition. Would going to the market be a solution that is taken into account considering as well the relatively low liquidity of the stock?

Yes, definitely. We have an agreement with a major shareholder family that in case we have a larger acquisition, they would accept that we do a capital increase without their participation.

And in the meantime, we have received no further questions. If there should be any questions left, you are invited to place them now, and I will hold the room for another moment. And it doesn't seem like that. We, therefore, come to the end of today's earnings call. You will find the presentation on the website of the Frequentis AG and also at Airtime by clicking into today's event. Dear participants, thank you for joining and your shown interest in the Frequentis AG. Should further questions arise at a later time, please feel free to contact Investor Relations. A big thank you also to you, Mr. Haslacher, Mr. Skerlan and Ms. Haselbacher and Mr. Wannenmacher for your presentation and the time you took to answer the questions. My name is Judith. It was a joy to be your moderator today, and I wish you all a lovely Tuesday. With this, I hand over to Stefan Marin for some final remarks.

Yes. Thank you to all of you. Yes, we are looking forward to the meetings at various investor conferences. Please find all events at frequentis.com/financialcalendar. And if you have any further questions, please feel free to drop me a line at [email protected]. Our next event will be our half year results, which we are going to publish on the 12th of August 2025, so in the summer. And without further ado, Goodbye and take care.