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

Welcome back. My name is Simon Jönsson. I'm an analyst covering tech and gaming here at ABG. Next up on today's agenda, we have the CEO of Net Insight, Crister Fritzson. Crister will hold a presentation of the company and after which I will host a short Q&A. The floor is yours Crister.

Thank you and welcome to the Net Insight session. I will have a presentation. Contain of -- First of all, I will look in a little bit of the product. market and market trends on the media business. Some highlights from the Q3 and a short financial update on -- from the Q3. And then I will move over to the synchronization of 5G sync product that we have signed a large contract with. So I think I'm moving directly into the first slide, AS present Net Insight. Net Insight is the company started over 20 years ago. As you can see, we have large global customers that we have served for many, many, many years. And we are -- we have products for media transport and specifically on live sport. So live event and sports is our focus. Just to explain a little bit where we are in the chain. I have maybe a little bit of busy picture, but I will try to explain for you. This is typically very large event. And this is actually from the summer games in Japan this year. And you can see if you go all the way from the stadium where we have the event, we have a number of cameras on the stadium. It can be up to 40, 50 cameras on the stadium. In this occasional case, to have a huge international broadcast center that they are producing everything, and that are hosted by a company that are using that or handling that. And in this, this is the IOC, the International Olympic Committee, that is the content owner. But we also have right holders in the broadcast center that actually are adding like interviews, images and so on to the production that host broadcaster are producing from each stadium and that are distributed from the contribution network that we call it, to like the right seller in different -- it can be a region, it can be a country like U.K. or Europe. In this case, it's a Discovery that you probably remember have the rights hold for Europe, NBC at the U.S. And then we have a number of channels that are broadcasting that out to the different pay TV platform. And as you can see in each and every step in this chain, we have products that are delivering that throughout the whole chain, even though we can go directly to the consumer through the DTT network, the terrestrial digital network. And in different occasions, we have different setup. So if this had been a smaller event instead of this international broadcast center, it can be like OB van, a production truck that's out -- just outside the stadium, but we are moving more and more over to remote production, and then we are transferring the camera feed all the way to the studio to the production to the like of Discovery and NBC. And that, of course, increased -- need for increased capacity in the network and it drives sales for us. So this is just showing where we are and it can be different set up in different events. But we have products in each and every part of the production chain. We're just going a little bit into the market size. I have like a picture of the total market that we're addressing in the media side. And I had divided that up a little bit more simply to show the trends in the market. In the bottom of the graph, you can see the media networks, specific media networks that we can have like Globecast, Arqiva, The Switch, they are more or less 100% focused on video transport from a live event or yes, media transport. But we also have large networks, IP networks like from the Arqiva have both a specific media network, but they also have an IP gateway network. But we can see large customers like AT&T to have a huge IP network that they will use for, of course, even the media transport. And on top of this, we see a growth of cloud or internet distribution. So that is the 3 trends that we see or 3 market segments that we see. We are increasing our footprint by moving in more and more to IP gateway. And it's based on the new standard that we see in the market is 2110, and it's actually coming from the studios. It is studio will be IP-based. And by that, you would like to have -- or the customer would like to have a full workflow based on IP from the studio to the TV viewer. And that also drive more transport over IP and the standard 2110. And we are accelerating our investment into IP. The acquisition of the Aperi product that we did last year, of course, has strengthened our position within the IP. But we are also moving over our existing MSR product to 2110. We just launched the JPEG XS, which is a compression based on IP, and that is of one the products that we are launching, just launched. And we would, during next year, continue to launch new feature and functions based to 2110, which will strengthen our product portfolio and definitely increase our footprint. If we look into the cloud side, we have the Edge product. And we have taken all the knowledge that we build up through the Sye product that we divested to Amazon last year. And we have now a product in the market, and you can see a number of customers that are using our cloud product. We can see that it's more Tier 2 or Tier 3 events that you are using for the cloud. But it's surely but quite slowly increasing volumes to cloud. And it's including the cloud and the hardware products, that's the strength. So we can have a full ecosystem of our existing hardware and the edge product as the offering to this segment. If you see the transition that we will like to do, we are focused on growth, and we are developing our business models. We are going from more product sales to solution sales. Going from CapEx to OpEx to have annual recurring revenue. We have already now a huge part of our sales revenue is coming from recurring revenue, and that's the support part of the business which is like SEK 100 million and growing. And with the Edge product and also that we see that our hardware product is more and more moving over to software. So if you see like the hardware product that we usually were selling as a hardware product -- today is the hardware product, 50% software and 50% hardware. And we are slowly moving in even the hardware product over to recurring business. We have mainly been focused on the service provider, but we are broadening our customer base, both more focused on the broadcasters, but also other customer segments like LinkedIn, the enterprise. We see the enterprises moving into this market because they would like to produce their own content to social networks. So we see new customer coming in. And we would like to increase our partnership solutions that we are having partners that we combine our product offering into the market to strengthen our position. If we just go into a little bit of the financial and update from the Q3. The financial target we set down during the spring, and we have 2 financial targets. One is that we should grow more than 10% in average from 2021 to 2025. So it's 10% growth in average. And the operating margin will be from 2021 to 2025, 10% and it's also average. So if we have a lower EBIT margin in the beginning, we need to have a higher margin, operating margin in the end, so it's in average. And dividends will be decided from the Board from year on. So if you look into the Q3, we have had a strong -- we had a strong Q3. We were over SEK 100 million, and that's actually the fifth time in Net Insight's history that we have been over SEK 100 million on the media sector, so it was a strong quarter. And you compare with last year, we had a growth of more than 30%. And you can see all regions were really overperforming compared with last year. And we can see it is not -- it was not a single or a few large deals that made this quarter it was deals coming in from a broad number of customers. The single biggest deal was actually an Aperi deal, that we delivered during Q3. It was close to SEK 8 million. This was in Aperi and we are very glad that Aperi is really picking up and that we are moving into the IP gateway. And if you look at the profit, the profit during the quarter was over 11% operating margin. And you can see from the graph, we have increased the profit since Q4 last year, and we're just above the 10% for the quarter. Just moving quickly into the synchronization. It was fantastic to see that we signed a huge deal with Türk Telekom, it's over SEK 220 million -- it was SEK 220 million. And I can say we did it again actually. Once more, we were able to -- with our leading-edge tech experience and the background technology and the knowledge of the market and the customer we were able to launch a global product. We did that with the synchronization that we owe -- with the Sye, that we sold to Amazon, and we did it again. And that's our culture, our definite experience of using our technology and launch it into a market to a huge global market. And specifically, the deal is it's a new 5G synchronization product that we would develop. A part of the deal is an [ re-fee ] support for prior development of SEK 55 million. And we would deliver our existing product that we have on synchronization already this year. Start to deliver, and that order was worth SEK 25 million, and we will start to deliver the new product in the end of 2023. The interest -- the most interest is -- interesting thing is actually, this is a huge market. And it's a big difference on the synchronization part of the infrastructure investment in 5G compared with the 4G network. Normally, 4G network is below 1% of the overall investment in the infrastructure. But on the 5G, it's actually 3% to 5%. And we estimate that the total market 2026 will be over $1 billion. That's the market that we are moving into. And we have a unique product based on the technology that we are already using in the DTT network. We have 15 to 20 network already using this technology, but we have strengthened our patent families. We have specifically for 5G, 9 patent families relating to the 5G. And if you look at into the product, the main thing with our product is the investment level can decrease dramatically by using our product. And it's a network synchronization. And as you know, for like in Sweden, the license holder need to have an alternative to GPS synchronization that is the common way of synchronizing the network today using GPS. But in Sweden, and we see other countries as well are demanding that they have another synchronization and that's the network synchronization. So that's the unique product that we have. Lowering cost is a network. You can rule out your network much faster than using existent or other synchronization and network products. And you don't need to invest and do a full uplift of your existing network. You can use your existent network operator and use our product based on that. Our competitor products need to have a fully upgrade network to be able to use that function on our competitor. So what we are doing now is that we are investing heavily into the R&D. We are accelerating our investment into the 5G sync. We have already now 10 to 15 engineers running fully to develop a new product. We estimate that we needed around 20 to 25 engineers to be able to deliver product in the end of 2023. But we are also expanding our cost of our market and sales activities. We are building that up right now and to have a global footprint to be able to deliver this product globally. Right now, we have 4 ongoing PoCs, proof of concepts, with operator. And this agreement, of course, strengthen the whole company and is also strengthening the media products because we are lowering the overall cost for the media side, which actually we have a fairly high fixed cost on its small revenue. And by that, we're increasing the revenue again split out the fixed cost that we have for the -- for instance, the global footprint that are quite expensive. So this will strengthen the company and strengthen the media product portfolio. So we are extremely happy for this, and we are really focusing on to bring this out to the global market. So by that, thank you. And moving over to you, Simon.

Thank you, Crister. And the 5G opportunity is obviously very interesting. It's a big game changer for you, I think. And could you maybe talk a little bit more about the potential for this solution? And maybe how it will complement other synchronization technologies in the 5G networks?

Yes. I mean the market is huge. You see an estimate like 2026, as we say in over $1 billion. So we have specific solutions that fit very well into the specific network like Turkey. But even if we look like in the Nordic that we see that we have a high penetration of fiber, we see that customers will use synchronization more based on fiber and have our solution as a complement. So this is fully compatible with other technologies, it's based on the network standardization. It is -- it's a sync standardization in -- for synchronization in the network, and we fully support that. So we can complement existent synchronization technology from other suppliers.

And in terms of the market potential for 5G sync, what part or what share of that market do you think is addressable for you?

We have just done the first estimate based on the customer experience that we have from the last 12 to 18 months. So it's a little bit hard to exactly specifically tell the part that we can address. But we can definitely see that our product is definitely fitting like the 30% to 50% of that market. But that will be, of course, update and have more security when we are moving in to have more customer dialogue, then we can be much more specifically. But it's probably above 30% and if it's 50% or 60%, we don't really know now. But is the mix between other solution with our solution, that is a little bit an uncertainty. But we see definitely that we have a huge market that our product will fit very well into.

Very interesting. And you sold off Sye.

Yes.

Is there an opportunity for you to sell or spin off this part as well? Do you think there are buyers?

No, we will -- yes, now we are so eager to just focus on selling and increase revenue and profits, we would like to develop even the synchronization product even more. We see that it's other market segment that we can move into, like the power grid to the fintech markets. It's a number of different markets that we see in the future that we can invest in and maybe see if we can have a product even fitting for those segments.

So you want to keep this baby?

We will keep this baby, and we will really -- we will very much focus on having a huge global launch of this and a great success.

And we have to talk about the cash distribution as well. You have announced the buyback program. And -- but what is the plan for the rest of the cash pile? And are you maybe looking at M&A? You have talked about it. How is that developing? And are you considering extra dividends?

I mean what we are -- as you are saying, we are adjusting the program right now. But we have communicated earlier that we are seeing our journey as 3 phases. First phase is more or less through that is setting the foundation. The second phase is to grow existent business. And the third phase is maybe looking into products close to our position in the market. Looking into maybe adding small M&As like the Aperi, to add more product and broader product portfolio. So that's actually in the third phase that we're looking into M&A's. And we have just started to evaluate that market, but it will take a while until we'll be more active in that part because right now, we are focused on launching the 5G sync product. We are growing the media side of the business. So we are -- we have a steady growth right now. So that will be the third phase and that is still ahead of us, and it will take a while until we move into that.

Got it. Thank you. I think that's all we have time for, I'm afraid. But thank you, Crister.

Thank You.

Thank you to the audience as well for listening in.

Thank you all.