Net Insight AB (publ) (NETI-B.ST) Q3 FY2025 Earnings Call Transcript & Summary

Good morning, everyone, and welcome to this quarterly presentation with Net Insight. It's the third quarter of the year that we will present today. My name is Andreas Joelsson. I'm responsible for the coverage of Net Insight here at DNB Carnegie. And as usual, I have CEO, Crister Fritzson, with me; as well as CFO, Cecilia Hojgard Hook. You will present the quarter, and after, we will have a Q&A session, and you are very welcome to send in your questions through the web. We already have a couple of questions, which is nice, and feel free to enter more of your questions. With that, I leave it to you, Crister.

Thank you, Andreas, and welcome to the Q3 report for Net Insight. And we have a standard agenda. We start with some highlights, business overview, and Cecilia will cover the financial, and we do a summary. And as Andreas was saying, we ended up with a Q&A. So Q3, after a challenged start of the year, we are glad to see that the demand in the market have stabilized and that have -- we have seen that in high sales during the quarter. And in comparable currency, we are in line with the revenue from last year Q3. We have a significant improved earnings compared with the first quarter this year, and it was mainly driven by increased sales. The cost-saving program has given us a good effect already that we started in Q2, and we have some seasonal effect in Q3 as well. And we are glad to launch the first 400-gig media-ready solution, which take us to the highest density in the market, highest capacity in the market. And we have been leading this capacity rise since all the way back to 2018 when we launched 100 gig. That was also the first product in the market. The good thing with that is this is lower the total cost of ownership for the customer, and I will come in a little bit more to that later on into the presentation. And if we move over to time synchronization, we are seeing continued strong momentum in that product segment. And it's still a growing customer engagement and an increasing market interest. And during the quarter, we had 2 new mobile operators that are moving into a test phase and evaluating our synchronization solution. A very key important event during the quarter is that the Turkish 5G license have been auctioned and Turk Telecom, of course, have received wide license, and they have started to ramp up the rollout of the national time synchronization network. So that started like in the beginning of Q4 and will continue during next year. If we then move in a little bit into each product or market presentation, we start with the media. We are focused on to be the partner that enable our customers to produce and distribute the live content flexible and cost-efficiently. And during the quarter, we have launched a 400-gig platform that definitely strengthened our position in the transport of media, live media. The important part with this is probably not just the 400 gig, it is that lower cost per service for the customer. So the total cost of ownership will go down for the customer. And that is a really important part and strengthens our competition in the market. This density can be used in existing product as well, the 100-gig product with the same density, which give us a very, very strong position in the market and protect our position that we have and we are leading in the transport. And we see already demand from several major customers, our own customer, major customer, and we will deliver start around year-end. The cloud product, the unmanaged product portfolio, is an important part because that's the growing part of the market, and we have a strong position. And during the quarter, we have launched new features and several new features. One is more efficient video compression that are really important for the customer and strengthens our competitiveness towards other similar solutions. And we are glad to see that we're winning the best of show with this product. Network security is also, of course, an important part because this is distributed over the open Internet. So security is crucial for our customer, and we have built even a stronger security around this product. So the new combination with high-capacity solution that we have and flexible cloud-based solution broadens our customer offering to our major customers and give us a strong opportunity to grow further into new market segments and take of cost, and grow our business with new customers. So that is a key position that we have, managed and unmanaged, and it will be more and more combined as an offering to our customers, and that's what the customers are asking for today. If we move over to time synchronization, we definitely see that the need for GPS independent time synchronization continue to grow. And our solutions fully meet the growing demand from operators and other public authorities. And they would like to have security, precision, of course, and really ability for the network that they are running. So we see an increased demand for this, and you probably have seen that in papers and in media that the jamming of GPS continues and increasing definitely. And I was just mentioned previously that we had 2 new mobile operators starting to evaluate our time synchronization solution. So now we are close to 30 customers that have testing have testing or are testing our product, and half have moved over to pilots or network installation. The customer dialogue that we have and the pilot project that we initiated since we launched our final product Q2 last year is progressing well, and several operators move into commercialization phase. And we have communicated, and we expect some of those customers to begin to roll out in the end of this year or beginning of next year. One actually quite interesting event have been during the quarter is that the Jammertest in north part of Norway. And we launched a number of new features at the same time during the Jammertest. One is GPS attack detection. It's important for customers to notice if they are jammed, and we have a probability to detect that. The Jammertest actually is a huge event. I will just mention some over 100 different companies during the event coming from 24 different countries. So it's an opportunity for us to showcase our product, of course, to potential customers. And we -- it's the first time that we, as a company, are joining that. Previously, it has been other -- they have testing our product, but we were participating in this this year. It was a great opportunity for us to show our product. By that, I will move over to -- hand over to Cecilia to cover the financials.

And with the financials, we see that demand is now stabilizing and returning to more normalized levels. And revenue for Q3 amounted to SEK 147 million, a sequential improvement from previous quarters, and the softened market we have seen, global uncertainty, and currency headwinds. In comparable currencies, revenue for Q3 is on par with last year. Moving on to gross margin. We're starting with an adjusted gross margin, and that was 66.3% for the quarter and for the last 12 months, 69% close to our 3-year average despite persistent FX headwinds and impact from high-volume deliveries that we have done during Q2 and Q3. Gross profit for the quarter amounted to SEK 77.7 million with a margin of 52.8%. So to R&D, and we continue to invest around 25% of our net sales in R&D, and this show our commitment to innovation. Of these, we capitalized around 65%. And by that, we are laying the groundwork for long-term value creation and future product launches. The strategic focus ensures that we will remain in the forefront of technological advancement in our industry. Moving on to results and starting with EBITDA. EBITDA for Q3 amounted to SEK 46 million, and margin rebounded to 31%. The improvement is driven by increased sales, cost savings, and seasonal effects. Looking at our Q2 program, the cost-saving program, it is on track to deliver SEK 30 million annualized savings by year-end. For the last 12 months, our adjusted EBITDA amounted to SEK 112 million with a margin of close to 21% Finally, looking at EBITDAC, that is EBITDA, including capitalization of development expenditures. And for the quarter, our EBITDAC amounted to SEK 29 million with a margin close to 20%. And this is a year-over-year improvement from the 17% we had last year. Moving on to operating earnings. And operating earnings for Q3 amounted to SEK 22 million with a margin of close to 15%. This is a clear improvement compared to the last 2 quarters. alongside increased sales and effects from cost saving program, Q3 tend to be the quarter with the highest margin, a result of seasonal effects with lower cost during vacation period. Last 12 months results and margin remained pressured by earlier quarters, with an operating earning of SEK 18.3 million and a margin of 3.4%. Looking at our cash flow, starting with operating activities, we have a positive amount of SEK 21.7 million. Then we have our investment from activities, mainly from capitalization expenditures of R&D, and that amounted to minus 17%. As a total, our cash flow for the quarter was minus SEK 0.5 million, and cash at the end of the period was SEK 96 million. During the last quarters, our changes in working capital has affected our cash flow negatively. And as you can see, cash -- our working capital at the end of the period was SEK 148 million. The increase we have seen during the last quarters is mainly due to increase of accounts receivable, but also due to the strategic component purchase of FAs we have done and where we, in the quarter, has done partial payments. Final payments will be done during Q4. This strategic component purchase will secure future cost advantages. Looking at our available cash, we have a strong position with the cash, including credit facility of SEK 181 million. So that was all for me.

Okay. Thank you, Cecilia. Just to go to the summary before we move into the Q&A. Just a quick summary. So a significant improvement in earnings compared to the first quarter this year. And that's as we have been communicating driven by increased sales. The cost-saving program is giving effect, and we have some seasonal effect compared with the first 2 quarters this year. And during the quarter, we launched a 400-gig platform, really securing the position in the market, very strong competitiveness around that product. And it's really showing our technology leadership within the transport of Live Media. So this will lower the cost for the customer, and we know that the customer are looking for lowering the cost, and we can offer that with the new platform that we have launched. And we will start to deliver around year-end. So despite the stabilization that we have seen during the quarter with the result of higher result, we see still geopolitical uncertainty continues to impact our market, which means that we maintain a strict discipline, therefore, remains on cost, even as we continue to invest for further -- for future growth. So we need -- we balance that, very focused on the cost, but also make sure that we continue to invest to get growth in the future. A key event that we have been waiting for is, of course, the Turkish 5G license, and we see a ramp-up from Turk Telecom that started in Q4 will continue in 2026. And the launch of the 5G is planned to be 1st of April next year in Turkey. For time synchronization, we see a positive progress with customer in evaluation phase or early pilot testing. And we expect that some of those customers will select our solution during the second half of the year and begin deploy in the beginning of -- end this year or beginning next year. So as a summary, with a robust product portfolio, increased competition through our competitiveness through the 400 gig product. And we anticipate as well as the decision from time synchronization customer, and they will move into the rollout phase in this year, beginning of next year. So this is really driving value and growth for the company. So thank you for that. And should we move over to Q&A?

I think that is a good idea.

[Operator Instructions] Again, if you have questions, please send them in through the web. There should be a square where you can write questions below the screen, so to say. Maybe I can start with where you sort of ended with the 400 gig. If you could explain a little bit more what it does that you haven't had before, and also maybe even though you say deliveries will start at year-end, what type of sales cycles are we looking at?

Yes. I mean we see that this has been an ongoing demand for high capacity because it's more content delivered, more service delivered, more live sports that should be delivered. So it is a content need for more high capacity for more content delivered from our customer. And we see like in Q2 that the 100-gig product is moved over to the venue, which means that they are increasing the demand in the core with the 400. So that's the evaluation we see in the market. So it's a content drive for more capacity. But on top of that, it's not just the capacity, the 400, it's also that we can offer more service on the same platform. The density have gone up, which means that we can offer more service for the same -- in the same product, which take down the total cost of ownership for our customer. So we are leading that, and we are the partner that really can offer that solution for our customer. We did that with 100 gig in 2018, and we do it again. So that is an important part for us to protect the position that we have in the market. So that investment is really protecting and secure the market, and we can also grow that part in the market or the position that we have in the market with new customer.

And the business model is the same as for the others. You have initial CapEx installation fee or CapEx, and then you have maintenance on top of that.

Absolutely the same, yes.

Very good. We have some questions, both from the web and also from other places when it comes to the IPO today of [ Appear ], which is working in the same area as you are doing. Could you just explain the difference between them and Net Insight, and where you meet them in terms of competition?

I mean we are in the same market, but we are in different market segments. We are in the transport, and they are more focused on the encoding, decoding part of the market. And of course, this is like we are very close to each other, but we have in different market segments. So what we have done is that we protect the position that we have with the SEK 400 million that investment that we have done. So we will continue to have the growth in the market segment that we are in. But we are also now moving into the market that Appear is now present in. So during next year, we will launch products that are moving into that segment or that market segment. So that's the strategy that we have, protect position, strengthen our position where we are. And now we will move into the market segment that Appear mainly have the business. And that segment is growing faster at the moment or -- Hard to say because it's very smaller segments. But I mean, we see that the overall market is growing like with 4%. That's the managed. The unmanaged that we have, which we have a strong position, that's increased like with-ish 10%. And the combination of managed and unmanaged is a very strong proposition to the market. And there we, of course, have an advantage toward Appear because they don't now have the cloud-based product. I mean I think they have communicated they maybe move into that or we launched that, but we have the Boost product and have that in the market. So we can strengthen our position toward the customer because managed and unmanaged is going together. They are in the production, they're using both managed and unmanaged. So that's a key advantage that we have. And the new product that we're launching, strengthen the cloud product, moving into the segment that Appear is present, we see definitely a good potential to grow during next year.

And we have a question from Patrick on this topic. Given that Appear has grown by 40% in the first half of this year, while you have been declining and are now flat. Has that growth come at the expense of Net Insight?

No. I mean, definitely, they are selling product to our customer, but we have been protecting our position with our customer. To my knowledge, I cannot guarantee, but I haven't seen any -- our existing customer moving over to Appear. So our major large customer is staying with us, and we are showing that definitely like in Q2 when we were having a $6 million order, and we continue to protect that position in the market. So we don't see that they have moved in and compete with us directly head-to-head. But we would like to increase our investment in that Appear segment. And over time, we would like to go ahead with in that market segment.

And then I was thinking about this large order that you took in Q2 and started to book also in Q2. I guess you have continued with that in Q3, but is it fully recognized at this point?

Yes. We have delivered -- it's completely delivered to the customers now in Q3.

And is it possible to say how much it has impact the gross margin? You mentioned that you have had high volumes.

Yes. I think that one can see that we have slightly lower gross margin during both Q2 and Q3. So that is some percentage points that it has gone down due to that order, and also some other larger orders. So a combination.

Another question from Patrick, on the inventory buildup. You mentioned this at the call, but just to be clear, is that only attributable to the FPGs? Or are there some Zyntai effects also from Turk Telecom starting to initiate their rollout again?

Yes. It's -- the big numbers are, of course, from the FBAs -- as we announced earlier over last year, it's around USD 7 million, USD 8 million. But the Zyntai has also some smaller effects, but that is much smaller.

And also from Patrick, and I guess this is the million-dollar question, when will business area time sync be larger than media?

It's a good question. The only thing that you see is that we estimate that the time synchronization market is larger than the media segment that we are operating in. So let's see what the future will have. We don't have any forecast on that. But it's a huge potential, of course. I mean we see Turk Telecom, they were placing an order for $25 million, and they are starting to ramp up, and we had an order book of like $130 million, I think, when we were coming into end of Q3. So of course, it is a huge potential of signing up large customer operator because the volume is extremely high compared with volume to a customer in the media segment. So a few of those Turk Telecom-size operator will, of course, drive the revenue dramatically.

And you continue to be optimistic regarding additional orders coming in late of this year, early 2026. Is there a slight delay in this because I think we talked about the second half before, and timing is, of course--

I mean we have tried to explain like the long process of selecting a supplier like us in a very critical technical area for an operator, because they will be like not locked in, but they will use our product for the next 6, 7, 10 years. So it is very important for them to select the right product. So that takes time, and it's crucial if not -- if the sync will not work, the network will go down. So that's like a key product for the operator. At the same time, they should do like the network planning. They should do the budgeting. They need to have resources really to roll out the product into the network. So it's a number of steps that they go through that they're quite lengthy. And many of the operators that we are into, I mean, like Turk, they are at the same time, building the 5G network. At the same time, they're building the network. So it's quite the sink network. So it's quite a lot of different things that they need to prioritize and make sure that they're doing the right owing. So it takes time. The good thing with this is that, I mean, for Turk Telecom, they will roll out for the next maybe 2 to 4 years, Zyntai product. And so it is a lengthy relation that we will have with the customer, and it will be like quarterly revenue coming from that. We see that from the customer that they start to roll out like in Sweden. I mean they are constantly buying each quarter number of Zyntai that they're installing in the network. So -- and on top of that, we will see next year that also the service and license will go up around the Zyntai product because now we are starting to get the installation. And then we have the support and license, which is more or less double compared with the media. So that will start to kick in next year as well, when we now have an installed base. So that will grow also over time. So I think it is a very attractive business and is very attractive going forward because we will have recurring revenue. We, of course, increase the margin, and we will see some margin increase on the Zyntai next year. Based on that, we get more revenue coming from support and licenses.

And the sequential improvement from Q2 to Q3, is that related to the Turkish auction? Or is that something that we will see in the fourth quarter?

No, Turk Telecom have been purchasing product during the year, but they are increasing volume, of course, right now when they have received the license. But we have other customers as well in Q3 that have been taking product. I mean we have definitely the first media customer that we're taking products, Zyntai product in volume in Q3.

And a question from Anders Thomson. Has there been additional proof-of-concept projects in the quarter than the 2 that was revealed at the Capital Markets Day?

You mean more than the 2 that we have.

Yes.

No. I mean it's the number that like is close to 30 right now. So that have been increasing with the 2 during the quarter.

And is the new Zyntai TimeNode, the 3,100E, has that been developed together with an Indian or Turkish customer, also from Anders?

It's also a detailed product. I don't know exactly what he's looking for. Maybe he's looking for that we have the Navi, the satellite product for India. I mean they have their own satellites. So we have developed that for India, and that we have launched is called NAC. So that's a specific product for -- to cover also the Indian satellite system. Maybe that's what he is looking for.

And will NetInsight announce to the market ahead when you sort of call off from the order book on the time sink?

No, we are reporting the order book like quarterly, and we will continue doing that. And so that's the same procedure that we have previously, we will keep that. So that's something that we report quarterly.

And then a question from Tony. When do you expect software and licensing revenue to exceed hardware revenue? And what are the main drivers and time frames behind the shift in that mix?

No -- over time, we don't see that the license and support will be higher than the hardware because still it is -- we would like to grow, and the installation of the hardware is still large -- much larger than the license income. But of course, over time, we are building up like an installed base of product, so the licensing based on the total installed base that are used so that we are measuring year-by-year. Some older product maybe should be scrapped out, but we are building up the overall installed base. So that's steadily growing, and we see steadily increase of the revenue coming from support and license. On top of that, we will also see that coming in from the Zyntai product, as I mentioned earlier.

Another question from Peter. Could you tell us more about the reason for developing the new version of Zyntai that was just launched? What are the customer-driven development?

I mean the new features that we launched, it was like to detect the jamming, and that's a feature that operators are asking for. So that's been demand from the market that they would like to have that to make sure that they can detect if they are jammed. So that's an important part.

And is that a software application that you can just add?

Yes. So all the new features that we have is always based on the software. The Navi part, that's for the Indian market, of course.

Yes. Another question from Anders Thomson. How does the demand look for the 400G model?

It has attracted huge interest from existing and new customers. And we are glad that we already -- we launched it during the IBC, and we see all the demand from the customer, existing customer, large customer that are waiting for product to be delivered. So that's a great signal from the market that they are looking for that product. And we have been in close collaboration with our large customer during the development of the product because that have been asked for the last 1 to 2 years. So we are really securing, protecting, and increasing our competitiveness in our core market.

And a follow-up from Tony on this. You mentioned that you could combine the 400 with the existing 100. And the question is, will the 100 gig solutions continue to be sold in parallel? Or will they be phased out as the 400 gig becomes more?

Definitely, they will be sold in parallel. And we have the 600 being the volume product, if we look back a few years or quite a few years. The volume on the [indiscernible] have increased in the last 2 to 3 years. So we see like it's definitely an increased demand for higher capacity in the market. So the 100 gig is extremely important part of our offering. And on top of that, we have the 400 gig. So it goes a little bit to different customer segments. It's not that they all need a 400-gig platform. They can have the 600 is 20 gig and they can 100. So we have broadening our portfolio, and we are looking into the unmanaged as well that will be like a part of our product, but that can also be used in managed network as well. So the 400 product that we have will be used in unmanaged and managed.

So it further increases the flexibility for the customers.

Yes, and broader portfolio, and you can combine managed and unmanaged, but much easier way than in the past.

Sorry for jumping back and forth here. Now we have another question on the time sink from Peter. Do you see interest from big telecom integrators for collaborations?

Yes, we do. And we have dialogue with large global integrators that are interesting to use our product in the relation that they have with operators. So that's definitely something. And I think we presented that on the Capital Market Day, exactly where we are moving, but local and global integrator over time is an important distribution channel for us, and we are working on that.

And Per Clint wants sort of confirmation that your goals of 15% growth by 2027 is still in place?

Financial goal, yes, it is still in place.

And continuing from Per, now that the 5G licenses are ready in Turkey and the rollout has started, do you think that the rollout will be completed in 2026? Or will it spill over into 2027 as you have flagged before?

It will spill over into 2027 as well. I mean it is -- and that's just underlying what I'm communicated or saying earlier, the rollout of a national network will take a few years. We are not doing that in 1 year.

And a follow-up on this. If understood correctly, the order you received from Turk Telekom does not cover the entire country. Between your thumb and 4 fingers, how many percent of the country will be covered when the entire order is delivered?

No. We don't have an exact number for that, but definitely, it's potential to have more orders coming in from Turk Telekom there going forward. But so far, we see that they have for the next coming years, volumes that they will use, and then we will have, of course, a new discussion with them if they would like to continue to expand in Turkey, the 5G network in Turkey.

Another one from Peter. At the CMD, you said that a big operator would place orders between SEK 75 million and SEK. It seems low since there are much larger operators than Turk Telecom out there, but they placed an order of around SEK 200 million.

Yes. And we should remember that the order that they were placed in Turk Telecom will include an NRE plus, that they were also using the existing 300 product, the media product that we have. So that's a part of the overall order that they have. But I fully agree that Turk Telekom, if you compare with the largest, the top 10, they are not in that level. So definitely, it's -- we can see a much larger operator in the market.

Then we have the same question from Henrik Bengsson and from Patrick. Any updates on the ITU process?

No, no update. It's still that we anticipate that it will be ready like mid next year that will be communicated. It's a little bit delayed. I think we will communicate like in the end of Q4, it's a little bit delayed. I mean it's a process, and many different suppliers are involved in that process and working with that standardization. So I mean we have some documents already approved, but not all of the documents that needed to be approved.

And then we have -- do you see any interest from Turkcell regarding Zyntai?

It's nothing that we can communicate it. We have communicated that Sacom have been taking an order in Turkey. That is a press release that I think we sent out last year, end of last year, I think.

Good. And then another one from Anders Tomson. NVIDIA and Nokia fits Net Insight like a hand in a glove.

You talk to each other.

I don't think I can comment that.

Just from my side as well, now with the 400 gig being launched, you have this inventory buildup through the FPGs. Is there any -- should we expect a further inventory buildup as you now start to deliver the 400 gig product? Or has that already been sort of reflected in the cash flow and working capital?

No, I don't think that it will be a further buildup for the 400 gig. So -- and then the FPAs that we have purchased, they will, of course, help our cash flow going forward. So no more buildup for the 400 gig.

And is that the same for potential Zyntai products that you will recognize revenues and get paid sort of as a normal process.

The Zyntai inventory are so low. So it's not going to affect inventory levels that much.

I meant if there are orders, will that impact then that you need to build up inventory, and we will have a--

If it goes very higher, yes. Yes.

I mean the FPA that we purchased in Q2 was a unique situation that we were securing like the volume for the next coming years. So that was a unique one. All the rest are the same process that we have, the same business model that we have with our EMS suppliers.

I think we are ready for a final question from Patrick. When ITU initially communicated, you mentioned potential for royalties. Can you elaborate on this opportunity?

No. I mean it's a standardized process. If you guess like the standard ITU, it can be that other companies can use that technology. But you should remember that it's a very small part of the product. The secret sauce that we have in our Zyntai is not being standardized. So it's called PTN, so that's what we have. So yes, it can be royalty coming in, but they cannot just use it directly to compete with us.

Thank you very much -- thank you for doing this and helping investors understand a little bit better. I will work on my ability to structure the questions for next time. And hope to see you then again in the Q4 report, which is 11th of February right now.

Yes. 2026.

Yes. Thank you so much. Thank you. Thank you.

Thank you all.