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

Good morning, and welcome to Net Insight's interim report for Q4 2023. My name is Crister Fritzson, the CEO of Net Insight and together with me today, Joakim Schedvins, our CFO. The agenda today is that we do a short summary of Q4 and then moving into the media update and then further on to the synchronization update and Joakim will then finalize with the financial numbers. And then we open up for questions in the end. I'm both very glad and proud to present the best quarter ever in Net Insight history, and it's also a record year for Net Insight. So it's the best results in 25 years. So we are very happy for the results that we have conducted in Q4 and in last year. We can see that the long term trend of growth and profitability is continued, and there is many of the strategic initiatives that actually already take place in 2020. So we have stayed focused on the strategy that we set, and tried to really find the growth in the market and invest wisely into the product that we see can give us growth and higher profitability. We're also very happy to have launched a new time securitization product in Q4, and that's after in time, and it's after 2 years' development. We have also established a framework agreement with Teracom and also started to deliver the first product to Teracom in Q4. And we are moving to a standardization process for our synchronization technology. I will come back to all of those points later on to the presentation. If we have to do a quick summary of the financial numbers, Joakim will go deeper into that later on into presentation, but we can definitely see that we have had a fantastic growth during Q4 compared with last year. So the net sales Q4 was over SEK 160 million compared to last year, EUR 125 million so it's a fantastic number. Even though the operating earnings have more than doubled since last year and close to SEK 30 million, compared a little bit over SEK 13 million last year. In fact, it's a 13th consecutive quarter of growth for Net Insight. And that's -- as I mentioned earlier, it's coming from the strategy and the focus to stay firm and make sure that we invest thoroughly into the profit growth in the market. But we also glad to see that the pipeline for -- the order pipeline for time synchronization that increased to SEK 195 million during Q4 compared with SEK 180 million end of Q3. And we have also shipped product for a little bit less than SEK 10 million in Q4. If we then move in a little bit deeper into the media market, we still see a headwind in the media market. We look at the overall market. It has been a little bit more positive signals in the U.S. And we can see that on our sales that had increased to last quarter in the U.S., the sales have moved up. But still, it's -- a lot of changes in the media market. We can see in the Nordic area as well. But the technology shift towards IP and cloud drive investments among our customers. The driver is actually that the studios is moving over -- towards IP, and our customer would like to have a streamline IP-based workflow from the studio all the way to the end customer and that cut cost and also take down production cost and make it much easier for our customers to handle that. And then we have, as you know, increased our investment in the last 2, 3 years in the media, and we continue to invest into the IP and cloud. And we see that -- we see more and more standard protocol coming out around the IP. But what we have done that's unique and give us a stable sales and keep our existing customers that we can offer an integration of our own unique technology together with the IP. So for an existing customer that can gradually move over to IP, keep the uniqueness that we have in our technology. And these new solutions that we have launched in the IP video is software based, which means that existing customers can keep the hardware and just upgrade with software. And that gives us, of course, a unique position among our existing customers that we give them a very, very smooth transition over to IP. If they like to do that or if they like to have a part of the network IP-based and keep our unique technology in other parts, today can mix and we are fully agnostic on IP or our unique technology, but we can also see that our sales of our unique technology have increased the last 2 years. Combined with that, we also sell more IP-based solutions. So today, we have a much broader offering of different functions and solutions around IP to give us the growth. We started to implement the IP video functionality into our 1000 series products, the high-capacity product. And during Q4, we have moved that also to our high volume 600 series. And we can see on the product mix for media is a 600 series, really increased sales during Q3, Q4. So today, we have full functionality in both the high-capacity products and the mid-tier product, the 600 series product. We're also glad to see that Europe, the last 2 quarters, have really increased in sales. And we have been taking some larger orders in Europe. For instance, in Spain, we delivered a quite large order based on IP video functionality. And if you go back a few years, normally a large order was SEK 1 million to SEK 10 million order per quarter, but now the last year, we have had a number of SEK 10 million order coming in and even larger order than that. What we have done, we have increased our expertise around the IP and cloud, both in the front end, the sales but also on the product management, but also specific specialists on IP, cloud, which has helped us to deepen the collaboration with our customers and partners. And we are much more earlier into the sales phase now than we have done previously, which means that we can work together with the customer partner to design the network, understand the customer need. And through that, we get the much more stable and predictable sales. And we can see during 2024, the average sales deal or average order had increased by close to 20%. Moving then over to our time synchronization product. As I mentioned, we are so glad that we have signed an agreement with Teracom. The network the Teracom have is a critical network. And we see an increased interest from critical network globally to move over to GPS independent solutions. But we also have received an order from Three Denmark. And the order that we have received from Teracom will be delivered during -- we started last year in Q4, but it will be delivered during this year. As I mentioned, we have commercially launched our new Zyntai product, and we have done the first delivery also Teracom as I mentioned, Sweden and to Türk Telekom. We have started to ship smaller volumes into the market. We announced last year that we had been in relation and cooperation with the major American operator, and they did the first trial that have moved over to a commercial trialing in Q4. And then, of course, a successful first testing of the product. The standardization of our technology that we are using in our synchronization products have started. And if you look into the telecom industry, all operators, the market within that segment are used to have standards and basing the network on standards so that is like an important milestones for Net Insight really to start the standardization of our technology. And that's done through the [ ETU ], the telecom standard forum, and that started in the end of last year, that will continue during this year and will be probably, hopefully, ready next year. And that, of course, create an increase reliability for our product for the customer that are interesting to buy our Zyntai product. So that's an important part of our launch of the new technology and our product to get it standardized. As I mentioned, the order book had increased SEK 180 million to SEK 195 million, and we have gradually -- and we will gradually deliver the order book in line with the out rolling of new network for the customer and the expansion that they have of the network so it will be a gradually delivery of the order book forward a few years. As we have mentioned earlier, we are -- we have a PoC with a power grid company in Europe. And we are still ongoing with that PoC, but we see also other power grid companies started to get interesting in our solution. The power grid market is going from an analog to digital so it creates a need for our solution for synchronized power grid networks. What we are doing right now is that we are evaluating the market potential, and we are also looking into our go-to-market strategy. So that's in a phase, and we are working with that right now. If we are looking a little bit ahead and looking into Q1, we will transition some of the PoCs that we have been running for a while with the old synchronization product and move that over to the new Zyntai. The few of the PoCs that we are running will start to use the Zyntai product for test right now, and we are aiming to start at least 2 new PoCs during Q1. I think most of you have seen the increased communication around the issue with satellite navigation systems, and they are increasingly facing threats from jamming and spoofing. And we have seen that in the press, in Nordic, in Europe and even in the U.S. So that it's more and more coming up to the agenda that this is an issue to use satellites as those navigation system, but also use it, of course, as a synchronization too. To regions like Northern Europe, Middle Europe, Baltic definitely are affected by interference on GPS. And GPS can be affected by natural things like solar storms, snow storms, heavy raining but also, of course, from jamming or spoofing. And we can see that when we start like 2, 3 years ago to start to talk about GPS synchronization and the issue with GPS, number of operators, of course [indiscernible] that as if it is not on the top of the agenda of operator, but it's coming up as an issue that needs more time to get handled. We can see that it is a general downturn on the sales around 5G, but we definitely see that the synchronization part of 5G is growing and it's driving increased demand for securing more reliable network solutions. I mean Sweden was the first country that were saying that you have to have an alternative for GPS as a synchronization too, and they were putting it into a mandate into the license that the operator has received. So they have to have an alternative GPS ready by the 1st of January 2025. But we see also that other countries is more looking into the Swedish model. And they are -- and we have had a number of dialogues with regulators and others in other countries to explain how we have done it in Sweden. And we see that other countries are trying to follow Sweden's model, and they are interesting to find a way of doing that in different areas. So we see a number of countries are following the way that we have done in Sweden. We will next week launch an article series and some video content. And we have done that through Netnod. And Netnod is the company in Sweden that handle in 5 different places in Sweden actually. It's -- you can get time from the network that Netnod have in 5 different places in Sweden. So that is 1 way of doing that, but together with Netnod, we have put together an explanation how we do it in Sweden, and it will be commercialized globally start next week. And that's the run wrap for the Mobile World Congress that will start the week after next. So I hope you would like to read and see the videos that we are sending out, of course that will give you a good view of what we are doing and what we are doing with Netnod and the drivers in the market. So that will come out next week, so you all can see that. Okay. Thank you for that, and we move over to the financial numbers. So welcome Joakim.

Thank you, Crister. And to start with, we can -- let's see -- there we go. Yes. As Crister mentioned earlier, Q4 is our strongest quarter ever with net sales of SEK 162.5 million, which is a revenue growth of 30% year-on-year. It's very confident that despite the challenging market conditions that we see, a little bit different in different regions, but that we -- despite that have this growth trend that, that continues that we have the 13th consecutive quarter of growth. And as mentioned previously, that's really a result of the investments we have done in our product portfolio, which have resulted in an extended product portfolio with new features launched throughout the year, addressing the growth areas in the market in this ongoing technology transformation where many customers invest and upgrade their networks. So high growth in the media business in Q4, particularly driven by the previously mentioned strong performance in EMEA region with a number of large deals where customer expanding and upgrading their networks. And it was also good to see that we have seen an increased activity and higher revenue in Americas in Q3 and also in Q4 after a soft first half of 2024 in Americas. Operating earnings also coming up to all-time high, almost SEK 30 million in the quarter, even if we are still in an investment period. And the earnings in the quarter is, of course, driven by the strong revenue primarily. But also, we can see, which is satisfying that we have a higher gross margin than last year. And that's really driven by the favorable revenue mix with increased support and license revenue from really extended portfolio of software solutions driving that. On the negative side, of course, we have some inflation-driven cost increases that we partly have been able to compensate by price increases. And on the cost side, we also have increased cost due to the strengthening of the organization within these growth areas, for example. And operating margin of a little bit above 18%, which is close to our long-term target of 20% that we set in the beginning of 2023, the 5-year target to reach 20% within the 5-year period. So that's also, of course, satisfying to see that. Looking at the expenses, in the period, the operating expenses, we have an increase of about 17%. And worth to mention is that we have, of course, as previously discussed, strengthening the organization related to, for example, the synchronization initiative and also other growth initiatives. And we have also had a new ERP system implementation going on under 2023, which was successfully launched in Q4 so that has also been some costs for that during the year '23 and during the quarter. Some increases in the quarter is related to the strong sales as -- for example, sales commission driven by the strong revenue in the quarter then. And then, of course, on top of that, some inflation-driven costs in addition to that. Development expenditures, slightly ahead of last year, almost SEK 40 million, and that's -- of course, this continued investment that we do to make sure that we maintain and increase our competitiveness and secure future growth then. And what's encouraging is that we can already now see the effect of the investment in terms of increased revenue so we can see that we decrease the development expenditures percentage of total revenue. Lastly, looking at the cash flow, we can see that the cash -- net cash flow in the quarter is a little bit more than SEK 4 million. We can see both in the quarter and full year that we continue to improve the cash flow from operations. And what's also encouraging to see in the quarter is when we look at cash flow from changes in working capital. As mentioned previously during the year, we have had an effect of the situation with the shortage of components where we have the last year or 1.5 year increase the inventory to secure deliveries and make sure that we are able to deliver to our customers. And now we can see that, that situation has stabilized, which means that we have been able to see the second quarter in a row where we reduced the inventory even if we have a sharp increase in revenue so that's satisfying. Worth mentioning is also when we look at working capital that we have, a little bit of negative effect, a decrease in liabilities, and that's related to prepayments from the time synchronization customer, Türk Telekom, that have negative impact in -- on working capital in Q4 and this year. And of course, opposite impact in last year when the prepayment was received. We have capitalized development, as mentioned previously, affecting investment activities in the quarter, and we continue this repurchase of shares program that we initiated earlier 2023 that have an impact of about SEK 15 million in the quarter. And excluding cash impact from share-related transactions, the repurchase of shares, the cash flow in the quarter was positive, SEK 17.5 million, and the cash situation at end of 2023 then is SEK 266 million. Yes. Thanks. Okay, moving into questions.

We had a number of questions around the product mix from media during the quarter. Should -- I mentioned that -- I mean our main drivers amongst the product is the 600 series, is taking a substantial part of the sales during the quarter together with the 1000 series. If you look on the Edge product, the cloud product, is annual recurring revenue, which means that we have quarterly based on this number of streams they are using and it's based on how much use of the cloud-based products. These 2 models, you can buy like free, how many of you will use during the quarter and then pay in the end of the quarter or end of the month or that you have a fixed amount of streams that you're using permanently long term, and then you can add that. So that's -- the streams is 1 part, and then we have a license fee for using the product, which is up to -- close to 20% of the stream cost they are also paying license fee for. And should we go in a little bit deeper on the product mix, Joakim, do you have numbers more specifically on the product mix, media?

Yes. We can say not exact numbers on that, but as you mentioned earlier, it's really the 1000 series, our main platform, and the 600 platform and the licenses related to that, that is driving the revenue in the quarter.

We have received a specific question about our Trust -- media Trust Boundary product that we have for the media product. It's a combination of number of features that is within that brand name. First of all, it's the security product. And many of the content is now delivered or distributed or open network. It means that securities is key. But it's also a function that helps you to control your network much, much easier. And what we are trying to do with the Trust Boundary, which is a real product that many of our customers are using today, is that -- gradually start using is that we are trying to moving all the unique functionality that we have in our unique technology, which is easier to use. And it's 1 of the downside with IP network. It is much more complicated to run an IP network, but we are trying to move that easiness of use into our product -- video product as well. So that's a unique like offering to the market that we are trying to work on to make sure that this will be as easy to handle an IP network as our existent or a unique technology that we are using. So this is something that we're really pushing and take the experience that we have from previous product into the IP video market -- segment or market as well. So that's a product that gradually can be implemented into existent customer or new customer. So that -- it's a stickiness product that we're trying to use and then it's really appreciating among many of our customers today. We have a question on our revenue support and services that -- can you comment that Joakim?

Yes, exactly. We can see that within support and services is the NRE fee that we received from telecom to support the development of the synchronization product, and that part is now fully recognized by October. So the impact, a little bit of reduction in support and services, is related to that the NRE fee have been fully recognized for Türk Telekom. Otherwise, the underlying support base revenue is still increasing. And that's the explanation to that.

We have received a question -- a broad question around how we can size Zyntai -- the lower Zyntai customer. And it's a very broad question, but mainly it's driven from our large network operator have. Of course, the order that we received from Denmark is a much smaller order than we received from Türk Telekom obviously, because Denmark is much, much smaller country and that have a much smaller network. And Three is one of the smaller operator and that it's based on number of base stations, but also how you design your network. And so that varies a little bit. You can have like -- Türk Telekom decided to have the product at site, but you can more have a centralized network that you have more in the core. So that's a little bit various how you design your network. But definitely, the size of the network, number of base stations you have, that's the key. That's the driver. And mainly the DTT network that require high security and very precise timing in the network, but also 2G, 3G and 4G use time, but it's not that crucial for those networks, but they need time. So that's also an area that can be in the future product or solution that we can offer with our Zyntai product. But today, we are focused on 5G because that's the main drivers in the market to have time synchronization for the 5G network. We have also received questions about the market size and volumes for power grid. And as I mentioned earlier, we are just in the first phase looking into that, and we do like a pre-study just to look into the potential of the market, how our solution is fitting to the power grid. So we are like in the first phase of looking into that. And of course, it's important to have a partner, customer that we can test our product, and that's the reason why we are running a PoC in Europe to get that understanding because we need to design our products to new profile for power grid, which is different to 5G, but we know that our product is fit in and it can be handle in a power grid company, but we need to understand fully how the product needs to be designed. And therefore, it's really important to have like a PoC to understand that, similar that we have a Türk Telekom. When we decide a 5G product, Türk Telekom was our key partner really to help us to understand the 5G technology and how that affects the synchronization that we had. As you all know, we have this functionality in our media products, in the digital TV network that we have probably around 20, 25 networks globally with the digital TV, and many of them are using our synchronization functionality similar to the ones that we have not for 5G. So that's also like a profile that we have developed specifically for the digital TV network. I think that most of the questions that have been coming in, I think many of them we have already answered in our presentation or I'm trying to elaborate a little bit after right now. Obviously -- I mean we have a question that is interest -- will GPS independent synchronizing increase? [indiscernible] has really be moving up among the telecom operator, but also has been much a broader awareness in the society, but definitely, understanding and need for GPS independent synchronization that really moved up. And we should remember that telecom operator previously before 5G have a fairly low knowledge about synchronization because they use GPS. So it was a very few people within the organization that had an understanding how to handle sync -- time synchronization. And the telecom operators are increasing resources and really increasing the knowledge how they should handle that. So that's a journey that we have had many operators to understand under the communication, but we are still like need for more information, more knowledge and understand how you should handle that and how that can affect your network. And then you are moving almost more to like industry, services or slicing of the network, it becomes more and more important to have precise time synchronization. And we had a question, can you say something about future 6G? No, I cannot say exactly, nothing around 6G, but other products which perfectly well into 6G as well. So moving from 5G to 6G is not an issue for us. Maybe it can be an upside because then we will have probably even more advanced services that need even more precise synchronization. We have received some questions around the standardization and that will affect our product and how we should license out. So I think that's a topic that we can come back to later and go a little bit into that because that's a common and very normal way of doing in the telecom industry to do this and it's the technology, not the product that we are standardized. That's important to understand. So no one can use our product, but it's technology -- or some part of the technology that we will standardize. Okay. Do we have any more questions. Okay. I don't -- I think that we have more or less covered most of the questions that have been coming in. So thank you for today, and thank you for listening in. And don't forget to read about the article that we send out next week around our collaboration with Netnod and how we see the market developed. So thanks for today, and see you in a quarter.

Thanks.