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

Good morning, and welcome to Net Insight's Q4 results. Together with me today, I have Cecilia, our CFO; and I have also Linda, our Investor Relation -- responsible for Investor Relations. And my name is Crister Fritzson. I'm the CEO of Net Insight. So let's look into the agenda for today. We will go through the highlights and the business overview, and we will cover media and time synchronization. Cecilia will cover the financials. And then, we will end up with an outlook going forward. We will also have questions in the end. So if you have any questions, you know that you can send them in, and we will have a Q&A after the presentation today. So let's move into the first slide and look into the overview. We have a successful year behind us with a number of new important customer wins within media and a strong growth in our focus market, America. And we have a high conversion rate from PoCs to commercial order in the sync business. We have a stable quarter in Q4 in the light of very tough comparison number from last year and the seasonal volatility in media coming from unpredictable budget orders. So Q4, normally, we see budget orders coming in as last year, 2023. But this year, we have less budget order coming in. This may be coming from that our existing large customer have had a significant investment in previous quarter 2024. We saw a strong increase in sales in -- of Zyntai in Q4, reaching up to over SEK 14 million. And the full year net sales growth is over 13% last year. And we have excluded NRE support from Turk Telekom on the R&D investment that we have done on the Zyntai. One of our main focus in media is to gain new customer, and we are very glad to see that we have 3 additional very strong large customers within media. And we received an order on Zyntai from a leading operator in Europe, and we signed our first Time-as-a-Service deal in South Africa. We see a continued growth from -- growing interest in the Zyntai from large operator. This is the change in the last 6 to 9 months that we see larger operators getting interest into Zyntai in all regions. And we have started new PoC with large operator in Q4, and it continues in -- even in Q1. So, that is a really strong and good trend that we see higher interest in general, but definitely from large operator. We will -- we expect that the contribution to our growth in 2025 will come definitely from Zyntai. And it's a little bit difficult to predict exactly which quarter the increase in sales will come with Zyntai. It's depending on when the PoC will move over to commercial orders. But we estimate an acceleration during the year and mainly in the second half of this year, we will see an increase in sales of the Zyntai product. Moving on and coming into the business overview and just start with the sales and the margins then. Our strategic focus resulted in solid growth in 2024. As I just mentioned, it's over 13%, excluding the NRE. The growth is coming from upselling existing customers. We know that we have a very good solution for the existing customers. It's easy to go from our DTM technology over to IP. It's a seamless move from the different technologies. But we also see a strong customer acquisition during the year. If we look at the CAGR and look between '21 to '24, the CAGR is over 16% or close to 17%, still strong. And the financial target that we have in growth is to be, an average, over 15% per year. We have a stable and good operating margin despite significant investing in the synchronization product, but also in the media product. We have like an accelerated investment in both those product segments. But we're also increasing investment in the front end to secure long-term growth of our business. So the operating improvement -- earning improvement in 2024 is coming, of course, from increased revenue, and a growing software and license sales also strengthening the EBIT. I'm comfortable with our financial targets of an average annual net sales growth of 15% and reaching an operating margin of 20% in the end of 2027. Moving over to looking into the sales in the regions. Again, as you can see, a fantastic year for EMEA with strong sales, and EMEA have had for the last 2, 3 years, a very strong stable sales. But our focus had been clear, and we have a clear target that we need to grow the American market. We have invested in IP-based products, and that has been specifically for the U.S. market that are very IP-based focused. And this has paid off. You can see that the American market during 2024 was growing with over 40%. So very strong growth in America last year, and we see continuous positive outlook for America in 2025. A little more specific on the media, as you know, our focus is on live event and in the sports segment, and that is definitely a growing segment. And we see also new players entering into that segment. Large players are investing in content and also on top of that, investing in the media product that we are supplying. So, that is the driver in the market, and that's our focus area. We will continue to focus on sports during 2025 to be even more focused on the larger leagues in all regions to really gain the growth in that segment that are growing very fast. I'm glad to see that our long-term investment in IP and cloud is paying off, and we see that we have strengthened our position in the market dramatically in the last 2 to 3 years in the light of the investment that we have done in those 2 segments. Now we can see that we have a [ major ] IP product. Even though that we continue to increase functionality in the IP, we see that the cloud is slowly but surely increasing in sales, and we are increasing in unmanaged to support the cloud products. So the growth last year is coming from existing customers that are investing in the IP-based product and also in the cloud. But we're also still happy to see that we are entering in with new customers. As I mentioned, in Q4, we have 3 major customers coming in. One is a major U.S. media company and one large Nimbra Edge order in Europe. It's very encouraging to see that we are moving in the edge segment. That is a long-term investment, and we see going forward that edge cloud will be more important going forward. And our long-term investment in Middle East, that we have increased our sales resources in Middle East like 2 years ago, really paid off with a large order in Q4 from an operator from the telecom sector. Okay. We understand that we had a problem with the transmission. So I will go back to the Zyntai presentation, and then Cecilia will come back with the financials. So coming back to the Zyntai, we see continuous increased interest in Zyntai, and we see several leading telecom operators initiating proof of concept in Q4, while previous ones are gradually transitioning into commercial orders. So, that is the trend that we have seen, and it's continuous. It's glad and it's coming from all 3 regions. So it's very important for us to sign up the large operator that we have discussed that the large operator can give a comfort in the market and lead the way and take down barriers for other telecom operators to use Zyntai. And we see that that's a trend that's coming when we have signed a large European operator. So that's very, very encouraging, and that will also give a clear message into the telecom market that our product is very, very competitive. And we also signed up our first Time-as-a-Service customer or provider in South Africa. Just a little bit just explanation what Time-as-a-Service is. It's actually -- it will not compete with like the telecom market or other larger markets like power grid. The Time-as-a-Service is more focused on smaller installations. It can come from like data centers or number 2, 3, 4 data centers that need to have time synchronization. This is a super-interesting solution for them to take Time-as-a-Service. It can be like radio stations that have a number of different stations in a country, and they need to have like time synchronization between them, and it's very easy for them to just take a service, or in the fintech industry. So there's a number of industries that are really interesting in time. Time will be like a crucial component in many, many different industries. And we see this is a great solution to easy very cost-efficient, get time as a smaller company or a smaller installation. And we see interest from a number of regions and countries that are looking into have this service. So we're glad to see that South Africa was the first country doing just that service. The service integrator or partners is a crucial part of the telecom market. And this is a crucial part for us also in our go-to-market strategy. The integrator is the companies that are actually helping the large operators for installation in the network, and they are key components for us in our go-to-market strategy. So we are glad to see that we have signed up more than 10 partners in all 3 regions in different countries like we have in Turkey and other countries. So that's an important part of our go-to-market strategy. We have been focused on that in the last 12 to 18 months, and we now have strong local regional partners. We're also looking into like large global integrator that can be interesting for us going forward to use. We see that the investment appetite in the global telecom market is slowly coming back, and it's driven by increased demand of functionality -- or demand for new functionality in the 5G network. And it's mainly coming from industries and other companies that would like to use the 5G functionality that are in the network, and that will drive Zyntai sales. If you have like an installation like that, you would like to have a robust service. And one crucial part is, of course, that have non -- GPS-independent. So, that is a driver for us, and we see that's coming in more and more. Okay. Hopefully, you have heard this now. And if you have any questions, you can take them later on after Cecilia's presentation. So I'll hand over to Cecilia and a little bit we need to move the computer to Cecilia then.

Sorry for the mistakes in the transmission, but now we go into the financials. And as previously noted, the fourth quarter tends to be more volatile than other quarters. And this year, we saw softened sales dynamics with fewer orders related to customers' remaining budget capacity than '23, while timing of incoming orders also was less favorable. As a result, our net sales declined with 17.8% compared to the same period last year. If we look at full year '24, our net sales increased with 8.7%, mainly driven by our focus region, Americas. If we look at our product group and product mix, we see that over time, we have a stable mix, though it can be somewhat volatile from quarter-to-quarter. But over time, we see -- we will see a slow shift to a growing share of recurring revenue coming from license fee from cloud-related media products and time synchronization. The gross earnings decreased on the back of weaker net sales in the quarter. Our gross margin before amortization in the quarter was 74.7%, which is above our 3-year average, and that is due to a temporarily higher share of support and service revenue in the quarter. Gross margin including amortization was 61%, and that is below last year and explained by a combination of the lower net sales and higher amortization of capitalized development. Looking at full year '24, our gross margin before amortization was 71.9%, and that is slightly above our 3-year average. And over a long period of time, we expect this trend to continue due to the shift in product mix. But this shift, we do not expect it to come rapid or significant in near time. Looking at EBITDA, we have a positive profitability trajectory with EBITDA margin improving along our net sales growth for recent years. Looking at full year '24, EBITDA increased from SEK 143 million and a 25.2% margin to SEK 160 million and a 26.5% margin, a sign of the scalability of our business. Looking at the right-hand side, we see our long-term value creation and development. During the year, we have invested 24% of our revenue in R&D, and a large portion of our development expenditures are being capitalized, a sign of long-term value creation in the company. During the year, we have gained efficiency by relocating development from the U.S. and India to Sweden. Our operating earnings amounted to SEK 5.2 million with a year-on-year decrease related to the lower net sales in the quarter. As we have a high gross margin, any fluctuations in revenue will have a large impact on our operating earnings. Operating margin decreased to 3.9% alongside weaker sales and continued investments in a strengthened organization, both in media, cloud, IP expertise, as well as time synchronization. Looking at full year '24, we have a stable margin of 13%. Now to our cash flow, and our cash flow for the quarter was before -- excluding related -- share-related transaction was SEK 4.1 million. Cash flow from operating activities was SEK 35.6 million, and this was with a positive reduction of working capital. Cash flow from investment activities was minus SEK 28.7 million and the result of our capitalized R&D expenditures. Cash flow from finance activities amounted to SEK 14.8 million, primarily attributable to SEK 12 million in repurchases of shares. Our net cash position at year-end was SEK 233 million, and that means that we have a solid financial flexibility to seize emerging opportunities and fund further growth, including potential acquisitions. Looking ahead at capital tied up in inventory of programmable circuits, [ FPAs ], this will increase over the coming years. And cash flow-wise, we expect the majority of the cash flow to related impact in the second half of '25. So, that was on financials. And now, moving back to Crister.

Okay. Just to sum up, I would like just to point out our key strategy, the growth strategy that we have. We have been very focused on investing in expanding the market, and we have been expanding the market through IP and the managed network that we are saying that has been like the main investment that we have done. We are still in the growth path of that. We see still that Americas will be the focus market. We have strong growth last year, and we continue like a strong continuous expansion in U.S. So, that is really great to see that we also can attract new customers. As I mentioned, we have attracted 3 in the quarter. And if you look at on the full year, it's over 15 new customers within the media sector, and majority of them have been moving in through the IP product that we have. If we look at the unmanaged, which is mainly the cloud, but also related hardware product, and unmanaged is more used in the Internet, the open Internet to transport. So it's a different type of products. We see going forward that unmanaged will be more and more important in market, even though that is fairly small today. And it will also gradually move together with managed and managed with gradually growth together. And it's a great thing for us because we have a huge installed base of managed products like the 600 and the 1060s, and that can also be used for cloud services going forward. And that's also as cloud is definitely recurring revenue that you can see further on that is one of our focus areas to really increase the recurring revenue. Broadened market footprint is definitely the time synchronization product that we have that we launched in second -- first half last year through our new Zyntai product. And the great thing with that is that we're using the existing technology that we have used since 2008, and we are moving into new market segments. And as I've been saying, that's really a very, very big and very big opportunity for us to really grow going forward. Recurring revenue, that's something that we have been focused on, and we have a large portion of recurring revenues as right now, but we would like to continue growing that. And it's coming from like the cloud product that I mentioned, license sales, but also the time synchronization. The time synchronization products have like a larger portion of license than in the media products. So we see definitely those 3 elements is the driver for increasing the recurring revenue. But we see also that we would like to expand in adjacent markets or technologies. And it's like a complement or an addition to our organic growth that we're also looking into acquisition. That is still ahead of us. We haven't really focused on that, but it's something that we will look into in the future. And scaling our business, we have been talking about that a lot previously, but we have a global footprint. We have like relation with large telecom operators. We have relation with large media operators, and we have like a high gross margin. So increasing the top line will really drive the EBIT level as well. So we see that we can scale our business with high potential. Okay. Let's sum up this presentation before we move into the questions. We have a successful 2024 behind us. Net sales growth was over 13% and driven by Americas growth of 40% and very stable sales in Europe. So we are very happy with that growth last year. Operating margin is stable, around 13%. And with a continuous high pace of investment in the sync product and in the media product, and we are building out the front end, mainly in the sync part of the business, we are building out the front end. With our investment in the last 2, 3 years, we have definitely strengthened our media position. We have a strong position now. We are -- continue selling our DTM technology, but we also have a strong position within the IP market. And the good thing is for existing and new customer, it is seamless that you can move between the technology, depending on what type of service that you would like to have. You can use the most efficient way of producing your content. Continuous growing interest in Zyntai and definitely from large operators in all 3 regions. And we see that we will have a strong growth in Zyntai this year, mainly in the second half of the year. So we have a very long-term growth perspective, albeit a somewhat cautious market in EMEA and APAC in Q1. We see some cautious signals in EMEA and APAC, while Americas showed good development. So, that was like a sum-up of the presentation. So I suggest that we move over to Q&A, and thanks for listening. So we move over to Linda to Q&A.

Thank you. Yes, we have a lot of questions on the call here. And let's start with the media business. The media orders you highlighted in the report taken in Q4 is the revenue also recognized in Q4?

Yes. All 3 orders saw new customers that we received in Q4. The first initial order from all 3 is recognized in Q4. We see all 3 customers that's -- as strategic customers because they are large. So we will [Technical Difficulty] anticipate that we will have [Technical Difficulty] going forward, all 3 customers. And the large order with edge is recurring revenue. So, that will like move on gradually and increase over the years. But also the large customer in U.S., a large broadcaster, one of the largest, we expect that they will be a good customer for us going forward. And I'm also glad to see that we have been breaking into Middle East with an order from one of the largest operators in the region.

You mentioned timing of incoming orders was also less favorable. Will this reverse in Q1 '25? What can you say about the demand in Q1 and generally about the visibility into '25 in media?

We see a little bit cautious in the market in Europe and in APAC. And we are, of course, looking into that like really crucial [indiscernible] to understand. We see -- at the moment, we see like also a caution attitude in the market. We think it's a little bit influence of the global uncertainty that we see. But we see that the orders are in the market, the big projects are in the market, but we see a little bit cautious in APAC and in Europe in Q1. But we see -- if we're looking into like the full first half of the year, we see like a strong pipeline in Q2. So we don't think this is like a change in the market. We see just a little bit cautious in the market right now on investment. Americas is like a good trend and that will continue to deliver strong, but APAC and Europe, we see some cautious in Q1.

Any insights into the reason why customers decided to save more of the budgets in '24?

We know that some of our customers or existing customers invested heavily during the year. So probably, they have less room for doing budget orders in Q4. But if you go back, we have seen that Q4 are very volatile because of the budget. It's more budget orders. It's less build-out or it's less new sport events that get started or moving from one service provider to another service provider. That's not the quarter. It's more like in Q3 that, that will happen. So last year, we were very happy that we received -- in the end of Q4 2023, we received 2 very large orders, and we didn't see that coming in this year. But if you look at the underlying business, we have like a stable Q4. And the reason why we have lower sales in Q4 compared with Q4 2023 is the budget orders. So we don't see any change in the market in Q4, but we see like a little bit hesitant in the market in Q1 for APAC and Europe.

What can you say about the reception of the newly launched media products from customers?

As I say, the good sign is that we signed up 15 new customers last year and 3 in Q4. I think that's the best sign saying that we have very competitive products. We have actually been taking deals from our competitors. We had outperformed them in those 15 deals, and incumbent supplier, we have been able to have a stronger offering, and they have been choosing us. So I think that's the absolutely strongest signal and make really comfort for me to see that we have a strong position that we have so many new customers. But we anticipate that it will continue this year. So focus still is to gain new customers. So long-term growth will come from new customers in the media and that our existing customers like Tata and the rest of them that they also grow their business and then we will grow our business. This is important for us to be with the right customers that have growth. And last year, as we saw that our existing customers were very, very successful.

What can you say in general about the gross margin in the different product groups, hardware, software, support? And given what you see in terms of revenue mix today, hardware, software, support, do you see a continuous stable gross margin in '25?

Sorry for us needing to change the computers. Regarding the product mix, we see quite stable gross margin over time. As I said in the presentation, we will see slowly positive trend, but that will be really slowly. If we look at the year, we have had some quarters with a higher gross margin than we should have had in a normal business, and that was Q2. We had a higher margin related to the software order we took SEK 30 million with a high margin, and then also a higher margin on gross margin before amortization in Q4 related to the higher share of service and support revenue. But otherwise, it's quite stable, but a slow trend and positive.

And back to you, Crister, again. You previously announced the upcoming launch of the 400 gig IP platform at the turn of the year. What impact will this have on the current installed hardware base? Will software updates be available to enable this increased capacity?

When we move from our 1060 to 100 and 200 gig or 1.2 terabyte, that was like a software, is the same rack as we had, had previously. We see the same way that with the 400, which will be like a software or a card that you will use within existing rack. It will mean that it will be a very easy and seamless move over to upgrade existing 1060 to 400 gig. So that's the way that we have been doing previously, like the 600 product. That's our volume that we have -- the highest volume -- the highest revenue coming from, that launched 2008. And it's more or less the same rack still, but we have new functions. It's fully IP today, and it's take down cost for our customer to move over to new technology or to new features. And it's, of course, very sticky for us. Our product is very sticky because it's a lower barrier to move over to new functions or new technology. So that's -- we will continue doing that. And we see that the 400 gig -- it's increasing interest in the 400 gig in our main -- with our main customers. They would like to see 400 gig because they need only capacity because it's -- we're going now over to full HD, new -- more and higher capacity needed to really serve the new features, and like full HD is definitely taking a lot of capacity, and we see now that's coming in as a feature. All of us probably have a full HDTV in our living room, but still it's very few that actually are transmitting full HD.

If we move over to time synchronization, why doesn't the Zyntai order from a leading European operator show in the order book?

The order is coming from one of our integrators that I explained in my presentation called Sekom in Turkey, and they have seen that order coming. So they actually had already placed that order in earlier than Q4, but the order with the large operator was signed in Q4.

Any insight into the potential size of the ongoing Zyntai PoCs once they materialize into orders? Ballpark, not an actual figure.

It's hard really to estimate like the volume on various operators. We have announced like 2 numbers that I can just give you. Like Three in Sweden, when we signed the deal in end of 2023, the frame agreement was SEK 30 million, compared with Turk Telekom that we signed an order for SEK 25 million in [ total ] and an order value just below SEK 200 million. So that's the range. Three in Sweden are the smallest operator in Sweden and a small operator if you look like in Europe. Turk Telekom is like a mid-high -- or mid-sized large operator. And then, you can see like the difference between them, and hopefully, you can estimate all the operating in between them.

All right. And if we remain on the synchronization area a bit longer, how are you progressing within the power grid with Zyntai?

Yes. We have announced that we have a PoC with one of the power grid companies in Europe, and that's continuing. So we are still in progress of working together with that operator. So it is continuing. So we see still an opportunity in the power grid sector, even though that is slowly moving. They are just moving over from analog to digital, and it started in Europe. It's a little bit more ahead in Asia and haven't started in the U.S. yet. So it will come, and we are in the first phase. But as you understand that the power grid company that we have the relation with, they are extremely interesting, and we are jointly investing in testing and making sure that we have a product that fits the power grid network. So I think that is a good signal.

How is the Zyntai demand from Swedish operators now, considering the GPS-independent regulation?

As you know, we have signed 2 of the 4 operators in Sweden, Telecom and Three, and we have announced that. We haven't announced anything more from the other 2, even though that we have a relation with them and they know our product. So we will see going forward if they are moving in and using our product. But so far, we have signed 2 of 4.

In the report, you mentioned that you expect the growth contribution from time synchronization to increase in '25 and primarily in the latter part of the year. Could you provide some more clarity on the factors driving this expectation?

Yes. It has been quite a lengthy process of like starting with like the first lab test in the PoC, and then they have a PoC in the active network. So it has been like a lengthy process of moving from PoC to commercial -- the first commercial order. But we see a high conversion rate on the existing PoCs that we have. We anticipate that the PoCs in time will go down. And hopefully, over time, when we have more customers like leading customers that I just mentioned in the presentation, that if more operators are using our product, hopefully, we will be able to move at least from the network PoCs, maybe a lab test just making sure that the product is working together with the existing supply that operators have, so we can shorten that time from PoC to orders. But when they have done the first commercial orders, it needs to be [ into ] the network planning and still operate -- telecom operators, they are still very focused on the budget years. They need to have a budget to really roll out our product. So it's a little bit -- as I think I mentioned, it's a little bit hard to really estimate exactly when the PoC will move over to commercial order and exactly when we see the growth coming from the operators that are moving in with our product. But as I mentioned, we see that it will accelerate in the second half of this year. And it's based on the existing PoCs that we have ongoing. So that's like the measurement that we have and try to estimate when they are ready to roll out or [ really new ] our product into their network.

And if we leave time synchronization and talk about M&A shortly or quickly, are you looking into bolt-on acquisitions, or more in general terms, what are you looking at in terms of M&A?

We are not fully ready with the strategy exactly which segment or market segment or product segment or customer segment or where we are really moving, but we see that we have a possibility of broadening our product portfolio, and we are focusing on products that addressing our customer, existing customer, mainly in the media. So we are just in the first phase of looking into that. But we see that we can probably find adjacent -- or products that are very close to our product portfolio that can attract the same customers and even the same people that we are working with today, which will be easier for us to move in a new product. And we see that we can use our global footprint and the relation with plus 500 large customers globally, and we can be a good like push for products that need to be distributed like in a global market that may have like in the region, a strong position, or in country, a strong position, and we can be the -- that can really broaden the distribution. So that's what we are looking into. We are not looking into like trying to integrate with large cost in with the existing product. We are more looking into like have synergies in the front end rather than in the back end. So that will take away like large and long investment in integrating them into our existing products.

Can you give some color on why the Board of Directors are proposing that no dividend for the financial year 2024 will be given?

Looking into -- and we have just announced that we are doing like a large buy of FPGA because we see that the time of that product is shortened, and we would like to secure that we have FPGAs for the next coming years. So that will take a little bit out of the cash flow, the free cash flow that we have. So the decision from the Board was to not have any dividends this year. And that probably will come up on the Annual General Meeting. That will be the time for the Board to present that.

Do you expect the potential U.S. tariffs to affect your business or otherwise, the Trump administration, in general, to affect your business?

It is extremely hard to see what will happen. So I don't think I have any insight in that. So I think everyone needs to try to see what happens in the market. So one thing that we see is the number of Canadian competitors that we have. So, that can definitely affect the Canadians. We don't know what will happen with Europe. So I don't know actually.

And a last question. The share is down heavily today. What can you say about the long-term value in the company and the investment case?

We haven't changed our view on the long-term perspective. We have iterated that we will reach the 15% growth annual and that we are on our way of reaching the 20% EBIT margin. So you shouldn't see that the little bit slower sales in Q4 that it changed the prospect of growing the business. And it's normal to have some quarters it's a little bit slower because we cannot anticipate exactly when the large order coming in, in Q1 or in Q2. So it can be a little bit volatile between the quarters. But we are still iterating that we see that we will reach the target that we have set, the financial target for 2025 and the long term for 2027. So that's -- we are very confident that we will reach the targets that we have been communicated. And I don't know how many quarters in a row that we have been growing. And it's, of course, a pity that we missed the Q4, the first, I don't know, 16 or 17 quarter in a row that we were growing. But we don't see any change in the market. I think that's still important. We see a little bit more cautious in Europe and APAC, but that will not affect -- hopefully, affect our long-term growth. And we see that our growth market, America, that we're really focusing on is doing well and a good prospect of growing in 2025. And remember, they were growing 40% last year. And still, if you look at the total market, U.S. market is much larger than Europe, but still Europe in our books have a higher sales than U.S. then you can understand the potential that we have in U.S. Okay. That was the last one. Okay. Thank you for listening in. I think that we have one more slide just to remember the calendar. The annual report will be published on 22nd. Q1 report will be on 29th of April, and Annual General Meeting is 14th of May in Solna at 10:00. And Q2, we will report in mid-July. So, thank you for listening, and have a great day. Thank you.