HMS Networks AB (publ) (HMS) Earnings Call Transcript & Summary

Welcome to the HMS Networks Q2 presentation for 2026. [Operator Instructions] Now I will hand the conference over to CEO, Staffan Dahlstrom; and CFO, Joakim Nideborn. Please go ahead.

Thank you, operator. Good morning, everybody. Welcome to HMS Networks Quarter 2 2026. Sunny day in Halmstad, where I'm sitting and Joakim is sitting a bit further south, north of Malmö. I hope the sun is shining there as well. Sun is also shining in our numbers. We are very happy to present this quarter 2 report. I start with a quick business update, then Joakim will do a detailed summary of the financial numbers, and then we end up with a Q&A at the end. But a few highlights. If you look on our net sales, good growth, organic growth, 12%. We're happy with that. In total, backed by M&A and some favorable currency, plus 18%, strong currency and a good quarter. Net sales, SEK 991 million. We are not really at SEK 1,000 million yet, but the coming quarters we'll get there. Also, order intake are solid, organic 15% and totally 20%. But we are not really seeing preorders. In quarter 1, we saw some preorders, mainly relating to the acquisition we made for this Molex business. But now we feel that there's a good balance between order intake and net sales. Fantastic development on our profits. EBITDA, SEK 266 million, growth from, what is it, 59% from last year. So EBITA margin stronger than our goal of 25%, 26.8%. We're very happy with that. But also very happy to see a fantastic cash flow from operations, SEK 334 million. So this really helps us in also how we leverage and how we deal with our debt situation. Joakim will talk about that. Strong EPS. So we're happy about the numbers. A few business highlights. We can move to the next one here. As we said, a good record quarter, but we also see that the growth is coming from all our big markets. So it's broad-based. We're very happy to see a 35% order growth in APAC, very good. The 2 major things driving this is our data center automation business. Why we say data center automation is that, as you know, we are not really part of the computing inside the data center. However, we see more and more that our customers directly and indirectly are involved in this data center expansions. These are huge facilities, and these large buildings require power, cooling, automation and other things. And we see that this is also driving our industrial automation companies' growth to deliver automation equipment into these huge facilities. And we also have a good position with semiconductor OEMs. These are the companies who make the semiconductor machines and responsible for the process. And of course, AI is driving the semiconductor market, and we also start to see a lot of good orders from our semiconductor OEM customers. We see the flip side of that coin is also increased lead times and prices for memory, especially memory, but also other components, semiconductor components and PCB is starting to have longer lead times, increased pricing, and we are trying to mitigate that as everybody else in this industry. But it's a hot market, and we see that also in the lead times. During the quarter, we also made a -- we call it strategic minority investment in a small Swedish AI company called Ekkono. They are really good in making machine learning technology. This is not a large language models that are cloud connected. This is embedded machine learning. So that's another way of doing AI. And our ambition is to work with them and also use their technology to embed in some -- embed in our products to make sure that our customers can both use the communication side of this, but also do some light AI functionality within their OEM devices. And we are very happy to receive the EcoVadis gold medal here in June. EcoVadis is a very big organization looking for environmental and sustainability aspects of the company, but also going beyond CO2, it's also about ethics and governance and responsible sourcing. So it fits very well into our strategy. And we are in the category of large companies together with Schneider Electric and Bosch to receive gold medal, which means that we are top 5% of all customers, all companies here. We are very proud of that, and that really shows that we are doing the right things in our sustainability work. With that short introduction of the business, I would like to hand over to Joakim to talk about the numbers.

All right. Thanks a lot, Staffan. Let's get going with the order intake. And as you've seen and Staffan also talked about, we see a little bit of a change compared to Q1 that we are not really seeing these preorders anymore, these long orders, customers placing deliveries throughout the year. And we talked about in Q1 that we had about SEK 130 million for these long orders. If you adjust for that, I'd say we are just seeing the same pace more or less that we've been seeing in the first quarter as well. And good solid growth here, 15% growth in Q2 and 12% year-to-date on the organic side. We actually see a lot of good demand pretty broad on all our markets growing well. What's a little bit surprising and very positive is that APAC is leading out the growth, 35% and also EMEA going quite well with 15%. Now of course, the comparable Q2 2025 wasn't our best quarter. So it's in one way a simple comparable there. But it's good also to see that APAC and EMEA is showing the way on the order side. On the division side, we have to note that the INT division is continuing to perform very well. We have now an organic growth of about 20% for 4 straight quarters. And I think we've been talking about this that it was expected that we're going to see a rebound in INT. I think Staffan and I have been mistaken a little bit on the timing. We thought we would see this more in 2025, a bit earlier, but now we've been seeing it for some time that we are coming back strong in the INT division. And also, Staffan mentioned it as well that the main driver is data center investments throughout the value chain in different ways we're coming in with our products. Same products as we always sell, but to various new applications for us. So that was a solid quarter on the order side. On the net sales side, very similar numbers, SEK 991 million, so organic growth of some 12% here as well. And you see we're closing in on the SEK 1 billion mark, slowly but safely growing. Of course, the Q4 and Q1 solid order intake has been supporting now the sales in Q2. We have, as you know, 2025, we didn't see the best growth in the first half, and now we're back to double-digit growth for the third straight quarter here. So that's also good to see that it's coming back solid. Book-to-bill happen to be straight 1. So I think that's pretty much what we can expect from the future as well, somewhere around 1.0 in book-to-bill. And here was a bit of a different mix on geographies. Americas came in strong with a very good start of the year on the order side and the 28% organic growth in sales. Talking about the different divisions. I think starting with IDS, the largest division with 46% of the profits and the big gearing towards the American market. I think we're quite happy to see over time, you see the bottom graph, we added also the EBITDA margin history since the first quarter 2025 when we made a split into the new divisions. And we see here that we have kind of established the business on a good operating margin level that is slightly above the 25% in the quarter, 27.5%, and it's a pretty good lift from where we started out when we established this division in the beginning of 2025. So that's very good to see. Also here, we have some product launches and both within remote access and network switches. That will be good important steps for the future growth until 2030. And the business plan we have with the strategy until 2030, this will be key aspects of building that growth. Also here, kind of a broad-based demand, good development in all regions, nothing that sticks out. And yes, a good solid performance in IDS. Then we go to INT. You see a bit of a different development here on the order side compared to Q1. This is where we had the majority of these prebuying orders related to the Molex acquisition, where some customers secured more or less the full year deliveries with orders in Q1. And I think we're quite happy to see that we get SEK 38 million of orders for Molex in Q2. We didn't really expect that to be as good. On sales side, I think we've seen that more stable, that deliveries will pace out in time pretty much as we see here. That's what we expect at least. We must also mention that, I mean, again, we talked about the fourth consecutive quarter with over 20% growth on orders, and we're very happy with the development, obviously in INT. Also here, you see a strong development on the EBITDA margin, now above 30%, and we've been around that level now for 3 quarters. This is maybe where we've been seeing the largest demand from semiconductors and data center investments. And that has been driving gateway business for us. And you'll see that when we talk about the margin soon, that this is also one of the reasons the gross margin has been strong for us. Then we have new industries. Here, we have also solid development with a 7% organic growth in orders, 11% on sales. Also here not meeting the best Q2, but it's a solid business. We know that we're struggling in the end markets within the Vehicle Communication that is selling a lot into the automotive market, which is obviously not the best, especially not in Europe. I think that is somewhat met up from a good quarter from Building Automation business despite the slowdown in the Middle East, which is a very important strategic market for the Building Automation business. So I think with everything going on in the world, if we can develop like this in this division, I think we need to be fairly happy. The margins, it's a bit of a smaller division, so margins can vary a bit up and down. And this quarter was a little bit softer. You see on the graph it's been bumping up and down a little bit between the quarters. So I think that's -- don't read in too much about that slightly lower profitability. Then about the profitability then. So we do an EBITDA of SEK 266 million, a new record result for us and 26.8% EBITDA margin, 27% year-to-date. So it's also good to see that we can keep this level above our targets of the 25%. And maybe the main contributor, except for volume is the pretty good gross margin of 63.8%, which came in a little bit stronger than what we expected ourselves here. The comparable of 61.8% is towards the Q2 level last year, which was tough from the tariff situation where we saw a pretty high tariff cost in the beginning where those tariff wars escalated, especially between the U.S. and China. Now the situation is much more stable. And we have not yet gotten any tariffs back. That is something we are working on at the moment and hope to be able to be successful with that. We'll come back to report on how that turns out. Otherwise, I mentioned also the strong gateway business from INT that is supporting the margins here as well. And that's maybe where we had a little bit of a positive surprise on the margin side. We know going forward, Staffan mentioned it as well, that we see now continued longer lead times, especially on memories, but also some other components. And also price increases are starting to take off. We've been seeing some already in year-to-date. However, for us, it's kind of been offset by having inventories. And going forward, we will not be able to supply by our own inventory. We're dependent on new deliveries, and then we will see a price increase that is coming. So I think we can have a bit of a margin pressure from this level in the second half. Nothing dramatic, and we will, of course, monitor the situation and maybe do adjustments if it's needed. But I think we can expect a slightly lower gross margin for the second half. On the OpEx side, we have been stepping up the investment pace a little bit, both in R&D and in strengthening the organization overall. We see an organic increase of 9% and a bit of a step-up as well compared to Q1. I think we have gotten in the most increase of the run rate so far this year. So I believe we'll see something similar to this level going forward for the second half of the year as well. So I think the run rate in Q2 is probably quite representable of what we will see. As communicated before, we have also increased R&D investments, and you see that also in the capitalized R&D, which is increasing a bit. So now we're at SEK 27 million in Q2, similar level as in Q1 and similar expectations for the coming quarters as well. I do also want to mention that we have a positive EBITDA impact of SEK 6 million, which is related to a divestment of a subsidiary. We're selling off the sales entity of PEAK France that we acquired in 2024. So we're selling that to the Managing Director that will run it in a way taking in a bit more special projects that we do not normally do in the group. So we feel it's better to treat this as a distributor on very good terms, and we're happy to continue this collaboration for the future. The earnings per share, SEK 3.65, nothing super interesting happening here. We have a slightly higher estimated tax, which is explaining the slightly lower EPS compared to the previous quarter, even if the EBITDA was on similar levels. Then I also want to make a couple of comments on the cash flow from operating activities, which was by far a record with SEK 334 million. We have a couple of things that is supporting a sort of a onetime effect here. We did have pretty high receivables going out of Q1, and that is now flowing in. So we were reducing working capital a little bit and getting a -- sorry, SEK 53 million positive effect from the working capital reduction. Also inventories are down a little bit. I think going forward, given what we said on the component side, on the memory side, we do believe that we will have to tie up a little bit more inventories. We would be happy to tie up and put a bit more inventories when it comes to memories. Now it's not so easy to do that given the allocation that is going on. But we'll do our best to increase and secure the demand on the memory side for the coming year or so. So that's the plan for the second half. Otherwise, for the year, also solid cash flow from operation of SEK 584 million, a pretty big improvement compared to previous year. And then let me also stop on -- looking at the net debt, where we have SEK 2.26 billion in net debt going out of the quarter, small increase actually compared to Q1, explained by the dividend has gone out in Q2 with SEK 241 million. We also made a final payment of the PEAK acquisition that impacted this a little bit. We're managing to come down to 1.74 net debt to EBITDA multiplier when it comes to the pre-IFRS 16 level, which is a small improvement compared to Q1. And given the legacy of the last year or so, I think we're quite happy to be on that level. And we're now focusing on some continued M&A things. And with the new division structure, we're -- I think we're on a good level in the divisions, having good dialogues going. So we're quite happy to see that. We also managed to reduce the interest cost, both, of course, from the lower leverage as such, but also from better terms in the new bank agreement that we signed around New Year. So that's good to see. And then for me, it's just left to kind of summarize what we said for the second quarter. I'll try to do this quickly. And as you've seen, solid organic growth, pretty much driven from all markets, record net sales of SEK 991 million. The 2 larger divisions are both on double-digit organic growth, both when it comes to orders and sales. And again, data center investments are the main driving factor for the growth. When it comes to profitability, we have also record profitability, record cash flow, very happy with the cash conversion here and looking good for the future even if we know. The third point here that we will have -- it is still a bit uncertain macro, and we know that we will see these longer lead times and slightly higher cost for memories. We just want to flag. We're doing all that we can to mitigate the situation, but there might be some disturbance during the second half of the year. And with that, I'd like to hand over to the operator for any questions we have.

[Operator Instructions] The next question comes from Jesper Stugemo from Handelsbanken.

Could you just help me understand how we should think about the strong margin improvement. You mentioned it here on the call, but the margin is quite strong despite the higher investments. Is this mainly driven from volumes and pricing and tailwinds from the gross margin and the mix? Or is it that the cost initiatives are still lagging here and you expect more to come in H2.

Maybe I can start with that. I guess you're referring to the EBITDA margin with the question.

Yes.

Yes, if we take the different parts, I mean, obviously, the gross margin improvement is helping that a bit. I think with that said, we've been on this operating margin level now for a couple of quarters. So it's not only that. I think what we see is the simple answer is like this, the top line is growing faster than the cost. And now you saw we had a 9% organic increase on the cost side. So I think we are investing in the organization as we would like to do. So I wouldn't say that there's a lot of things lagging on that side. And then it's not given that the growth would be forever double digit organically. So I think that is -- right now, we have a good pacing on top line versus cost. And as I mentioned, I think we have -- at least for 2026, we have set the organization we believe we need for the rest of the year and taking the main investments that we need for the rest of the year. So I don't think you will see a higher pace for 2026. We need to be able to absorb the things that we add as well.

Okay. Great. And how sustainable is the current strength in data centers and semiconductors, you think? And how much of the demand is project-driven versus temporary.

Maybe I can take that. If we try to zoom out a bit, it's clear that we're not involved in the compute, the servers and the IT environment. That's not our business. But we see more and more that we have 3 different things that, first of all, our industrial automation customers like the Rockwell Automation and Schneider Electric, they are selling quite much automation equipment to these facilities for cooling and power and all those things. And there, especially our division INT is coming in where we are embedded inside their things that they sell to the data centers. That's one pillar. The second pillar is that we have our own system integrators that are involved in this integration of systems inside these big facilities. There, we mainly sell the division IDS through the American, mainly system integrators, where we sell gateway, switches. And these are more of the things that they realize when they do this kind of, oh, wait a minute, we have the wrong protocols between these 2 machines, let's buy 50 HMS gateways to solve this problem. So that's the second pillar. The third pillar is what Joakim mentioned about the semiconductor, where we have good business with the OEMs in semiconductor, the machine builders. And of course, AI, the compute side drives all these investments in semiconductor fabs. And there, our customers is supplying the machines. So all these 3 different pillars are indirect to the data centers, but we see quite clearly that they are driven outside the data center momentum. Okay. Now we see how long will this momentum continue? Well, right now, we see enormous investments, especially in U.S. about these facilities. It will not continue forever, I'm quite sure. But right now, we don't see that it's slowing down. There seems to be a lot of investments, and we see that this Magnificent 5 with Meta and Google, and they all invest heavily in this. So I think we are floating behind because all these automation investments related to data centers. And we see this as a continued trend for quite some time, we think.

And how large is semi and AI data centers verticals for you, you think?

Yes. I know you asked that. And we don't -- as I say, we are supplying our standard products to our normal customers. And for them, part of their business is data center. So we don't have full transparency, and we don't have data that -- trustworthy data that can say how much is our market share and how much of that is our business because it comes as a portion of our regular business. So we don't really have good data on that.