Net Insight AB (publ) (NETIB) Earnings Call Transcript & Summary

Hello, and welcome to the Net Insight AB Fourth Quarter 2019 Report. [Operator Instructions] And just to remind you, this is being recorded. So today, I'm pleased to present Anders Harrysson, Interim CEO; and Pelle Bourn, CFO. Please begin.

Thank you very much. So here, at the Net Insight headquarters in Stockholm, you have Anders Harrysson, CEO; and Pelle Bourn, CFO. And we're here to report to you on our Q4 2019. So to summarize Q4, as you probably already noticed, our sales was flat from same time last year, SEK 105 million. Our operatings earning were minus SEK 24 million, and that was largely driven by items that affected the comparability. And a few notes here that minus SEK 20 million was related to strategic advisory services where we planned but canceled the capital injection we were planning for, which was not necessary after we made the transaction you're all aware of, plus the CEO severance pay, which happened in 2019. Excluding items that affect the comparability, which was SEK 20 million, the operatings earning would have been minus SEK 4 million, which is SEK 7 million positive for the Media Networks business area, which I think is important to notice. We divested Sye to Amazon for approximately SEK 350 million, which generated capital gains of approximately SEK 245 million, which we then will be -- which will be recognized in Q1 2020. What we've done also in Q4 is we increased the focus and the investment level in the core business, which is Media Networks. We're spending more on product development and also customer communication, which we hope will give us some positive results here as we're going into 2020. Moving on to a business update, which is the full year 2019 summary. And the way I'd like to summarize 2019 is that it's been a very hectic year. We are trying to building the new Net Insight that is starting now to emerge. New organization. We have, as you now seen since Q3 report, 3 business areas that we report separately, and that's in line with our aim to be -- become more transparent with you. So the segment P&L reporting is here to stay. In 2019, we also reduced the cost base. A new -- both a new interim CEO, which is myself just here, and a permanent CEO, Crister Fritzson, is hired and will join the company shortly. Plus there have been some very interesting, very good change in the executive team. I've already mentioned that acceleration of the Nimbra products development, which I think is important to us and which I think will yield some positive results in 2020. ScheduALL, which is our company in the U.S., is modernizing its technology platform. It's version 5 of the platform, which is currently installed with most customers, and we will announce and start shipping our version 6 shortly, which is a big thing for ScheduALL. And least -- last but not least is the divestment of Sye. So moving on to the group update to Q4. Divestment of Sye to Amazon generated approximately SEK 350 million. And what's worth mentioning here, which we reported on before in our press releases, is that by working with Sye, we gained some very, very interesting -- we gained some very interesting knowledge and understanding of virtualized software, cloud-based technology, which remains in Net Insight, and you will see that built into products going into the future, the first one being Nimbra Edge we will start shipping shortly. The previous announced plan for capital injection is put on hold, as mentioned, and the intention is to redistribute funds to shareholders. And more about that later on at our shareholders' meeting in May. There will be an increased focus and investment in the Media Networks business, as I've already mentioned a couple of times. We see growth opportunities with both new and existing customers by complementing the product offering. The additional growth upsides in attractive segments were things happening in the marketplace that we are really addressing aggressively now, which is remote production, internet transport and, of course, delivering our services and products through cloud-based transport. And the new CEO, Crister, joins in April. He will get back to you with details on the Media Networks growth plans and the forms and terms of the proposed capital redistribution later on. So that is to come later. Thank you. Next slide. I'd just like to -- before I hand over to Pelle to give you a run-through of all the numbers. Our core business, which is Media Networks, again, the way we are seeing it is that in Q4, product development was accelerated. We also received our first orders for our 1060 products from Tata Communications. They are starting to extend their core network, and we're beginning to ship 1060s to them, and there will be more to come. We had a sales growth of 6%. And for the full year of 2019, the operating margin was 14% in Media Networks, excluding items that disturb the comparability. The future product potential in -- for Media Networks is in remote production, IT, cloud-based transport solutions. And there will be a piece of work done, where the new CEO will get back to you after he has joined with a more clear view on where we are taking Net Insight and how we're going to grow the business going forward. So with that, I would like to hand over to Pelle with some of the numbers.

Thank you, Anders. First of all, I just realized that on the previous slide, we choose the wrong language when it comes to capital injection. It's not put on hold, it's canceled, which we also say in the report, but we made a mistake in transcription here in the webcast. So it's not put on hold. It's canceled, which is semantics that are important. So I think the question here that you may ask is regarding the operating margin in Q4 for Media Networks. We've been talking about 20% before. So as mentioned in the report, there are some items affecting comparability, mainly the Media Networks' share of severance pay for CEO. So deducting that, we are at 14%. Then it's also important to notice here that, as we said in the report, when divesting Sye, the Sye part of the central functions cost that we have been distributing to all business areas is now being redistributed to Media Networks and Resource Optimization because most of that is cost that is fixed or semi-fixed and does not follow the business. So that in itself had a margin effect on Media Networks for Q4 of around 3.5%. So we could then say that the underlying comparable margin compared to 20%, as we said before, is around 17%, 18%. Q4 sales, not the highest, and we did have a gross margin that was a couple of percentage lower than in Q2 and Q3, depending on product mix. So that kind of explains the low margin in Q4. As you see for 2019, the full '19, we had an operating margin of 12.3%. Doing the same exercise, taking out the items affecting comparability, et cetera, we've come to a margin of 16.5%. And if I then include the effect of the Sye cost allocation, around 3%. The comparable margin compared to previously would be around 20%. So kind of underlying in the region we had before when we segment reporting in Q3. Moving on to Resource Optimization. The figures are still here in red. And we are in a phase where we are developing a new solution. It's progressing as planned, and the commercial launch is planned for Q2 2020. The actual resolution was presented conceptually last year at the NAB Show. Now we are ready to launch it commercially. And this means that we are in negative figures. We will see that later on, on the breakdown on revenue types. License sales for the old solution is obviously going down in anticipation of the new solution. We also said in the report that the potential that we see in this business are primarily in other areas than where we have synergies with the Nimbra business. So in -- on longer term, we see that this company or this business will probably benefit from another owner, but that's on the longer term. From now on, we are reporting this as a segment, and we will actually operate this business unit more and more as an independent unit. So continuing then on Q4, the continued operations and continued operations here that means the remaining business, which is Media Networks, our Nimbra portfolio and Resource Optimization, the ScheduALL portfolio. So net sales in line in SEK with the previous quarter -- sorry, corresponding quarter in 2018, minus SEK 4 million operating earnings, excluding items affecting comparability. So we had SEK 20 million in items affecting comparability. We have explained those. That is roughly SEK 16 million related to strategic advice in conjunction with the planned capital injection. As we said in Q2, we were going for a increased efforts in Sye, which would require capital injection. That was -- work was started, came a long way, and then as we've been informing you, we have an opportunity to divest Sye, which meant we cancel that work. And then it's about SEK 4 million in severance pay for the previous CEO. That's the SEK 20 million. The full year sales was more or less in line with previous year with no growth in nominal figures, basically, which is one of the challenges that we have. But as Anders said, we know where we see the growth potential for the Nimbra business. Cash flow continued to be negative, and we can come back to that. Looking into sales by segment and type. For the Nimbra business, the Media Networks business, we can see a shift between hardware and software licenses compared to 2018. This kind of swing is normal. It's not a trend where hardware part is going to be bigger than the software part in the long term. But we see this when we sell hardware to existing customers that already have software licenses, so the main reason for hardware revenue growing over software revenue. And we see that also the same for the full year. And for Resource Optimization, it's very clear. Looking at the quarter, SEK 1.6 million in software licenses compared to SEK 6.5 million in 2018 related to the fact that we are launching a new version and, of course, have lower revenue on licenses on the new version -- sorry, old version. Gross margin, excluding amortization with capitalized development, has a tendency to swing between 75 -- 70% and 75%. The main driver of the swings is product mix for the Nimbra portfolio. Gross margin, including amortization of capitalized development expenditure, shows an increase in Q4 versus Q4 in '18, and this is mainly due to lower amortization on R&D following the write-down that we did in Q4 in '18. The expense side. So operating expenses Q4, SEK 2 million lower in -- than '18. We -- and the kind of difference between '18 and '19 is the same also if you exclude items affecting comparability. However, if we adjust for the items, one-off items and currency exchange effects, we see that we have a 10% decrease in operating expenses underlying like-for-like, which is an effect of the cost-saving program that we launched in the beginning of 2019. Full year, the total cost decreased like-for-like underlying was roughly 5% or SEK 14 million. So the cost program we launched had the effect it intended. It intended to reducing the cost base with SEK 25 million. And obviously, we've had other items that has increased. We continued to invest in R&D to improve competitiveness. Anders touched on the Nimbra Edge product, which we're investing in and taking to the market very soon. That's why we see an increase of development expenditure. Also we see the increase because of the efforts for the modernization of the ScheduALL solution. This graph here describes the operating earnings change from 2018 to 2019 Q4, excluding the items affecting comparability, mainly gross earnings, SEK 9 million higher, and we have reduced expenses, mainly on sales and marketing. And then we have exchange rate differences. That's kind of simplified explanation and where we see the effect on the cost program. We are aware of that it may not be totally clear or easy to follow the results of the individual business areas because of the items affecting comparability. And we are going to be more transparent in figures, so to speak, tables in the coming quarterly report to make it easier to analyze the underlying result and only the reported result, which is, of course, the one that counts. But it's also important to understand what's behind those numbers, considering we are making a lot of changes that has one-off cost effects. The cash flow, this one includes discontinued operations, meaning includes Sye, minus SEK 14 million for the quarter. And this is basically the -- what we see is that the cash flow from operations and change in working capital is lower than the investment activities. Cash flow from financing activities here is basically IFRS 16 effects. We do have a positive change in working -- cash flow from working capital. But again, still not enough to take us to cash flow positive. And we don't have the analysis here of what this would be -- the cash flow will be without Sye, but it would be a positive for the quarter, excluding it. The cash effect of the divestment of Sye would, of course, affect figures in Q1 2020 since that deal took place in the beginning of January. And with that, I'll leave over to you, again, Anders, for the summary of this presentation.

So thank you, Pelle. Well, again, you've heard our presentation here, and just to summarize what we've said is that we've had a Q4 revenue which has been flat year-over-year. And the operating earnings were negative SEK 24 million, and I think we've been through the reasons why and what's been driving them. The main event for us in Q4 was, of course, the divestment of Sye to Amazon, where we got SEK 350 million and which then generates some capital gains in Q1. And we are, of course, planning to get back to you on the way forward for the new Net Insight, but what we can already now report on is that the increased focus on our core business, which is Media Networks, the focus has increased, and we have upped the investment in R&D. There are some interesting products coming out, talking about Nimbra Edge, talking about some -- filling the gaps in the existing Nimbra product line that our customers are asking for, looks very positive. So I hope that during 2020, we are able to monetize this increased investment in R&D. And as you understand, that's, of course, our plan. So hopefully, we can get back to you in the Q1 report and give you an update on how this is going. And apart from that, I think if you don't have anything else to add, Pelle, I think we're done, and we are now open for questions you might have.

[Operator Instructions] At this stage, there are no questions. So can I please pass it back to you, Mr. Harrysson, for any closing comments?

Okay. No questions. Well, if you don't have any questions, I assume everything was...

Sorry, I apologize. I do apologize. One has just literally jumped in. Can I pass you over to him? Okay. Well, in that case, the question is over to the line of [ Sukhail Mata ] at [ Ferris ].