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

Good morning, everyone, and welcome to this Q2 Presentation from Net Insight. I am Andreas Joelsson, responsible for the coverage of Net Insight here at DNB Carnegie. With me in the studio, I have Net Insight's CEO, Crister Fritzson; and CFO, Cecilia Höjgård Höök. Before I hand over to you, I will encourage everyone to send in your questions in the chat function that you find on the same web page as you see me right now. So please send in the questions, and I will read them after the presentation. And with that, I hand over to Crister and Cecilia.

Thank you, Andreas, and everyone, welcome to the Q2 report for Net Insight. And the agenda for today is that, we will go through the highlights during the quarter and the business overview, and we start with media and time synchronization followed by that Cecilia will go through the financials, and then we will do a sum up of the Q2. And as Andreas was saying that we will have a Q&A after our presentation. If we look into the Q2 result, I'm so happy to see that the revenue is coming back, and we have an increased revenue compared with Q1 and Q2 -- Q4 and Q1, and that's glad to see. But also, if we compare with last year Q2, we have an increase if we take out the one-off software deal that we received in Q2 2024 and have the currency effect also excluded, then we have a 4% growth quarter-to-quarter. So that's really great to see. We see still that the market remains very uncertain and the risk of delayed orders. I mean, the orders are in the market, but they can be delayed or move out to the next quarter, so they're not disappearing. So that's the same that we have seen in the last 2 quarters that this is a high activity level in the market. So we see a strong demand for our product and service, both in the media part of the business and in the time synchronization. If you look into the Q2 and the different deals that we have made during Q2, we are so happy to announce that we have received one of our largest media deal ever in the company history, and that definitely demonstrates our competitiveness and strong position in the key growth areas that we are investing in and what we have invested in, in the last 3 to 4 years. So it's a high-capacity solution that we have delivered and it's IP-based and remote production. So that's specifically those areas that we have invested in, in the last years. During the quarter, we secured our first time synchronization deal in the media market. We know that in the media market, when we are moving over to IP, we -- the media market need PTP time synchronization. So during the Q2, we have developed the media profile for the time synchronization product that we have and we secured a deal with one of the major global sports event. So that's like a step into the media business that we have a strong position that we see that we can see growth in that area of our time synchronization product that we have. That’s definitely a product that can be driven or a solution that can be driven of time as a service and that can supply that service to the media market, which will drive volumes for us in the time synchronization product portfolio. We received a field trial order from a new 5G operator in North America during the quarter. We have not seen the growth in time synchronization we invested for during the last 6 months. However, we continue to experience a strong interest and a strong demand from the 5G market and robust synchronization has become a global priority. We see that definitely that 5G operator is looking into have GPS-independent solution. We see the government and regulatory bodies that really are focused on time synchronization and looking into how we should handle that without using the GPS or GNSS. To mitigate the effect of the temporarily hesitate market, we initiated a cost saving program during the quarter that we announced in Q1. And the cost reduction that we will do is SEK 30 million on an annual basis, and it will be full effect in Q1 2026 and gradually increase during Q3 and Q4 and then fully implemented in the beginning of next year. If we move into the specific market and start with the media. It has definitely been an intense and eventful period for the media segment in the first 6 months this year. We have launched a number of key products and features into the market, and we have started strategic collaboration with other partners. Just a few examples. I mean, we can see that we have a partnership with NETINT technology that we integrated the AI solution into our cloud product that definitely will strengthen our product and give a number of new features to our customers. We have deepened our partnership with Globecast in moving live sport from satellite to cloud. You know that we have discussed that this is a growing area to move content from satellite to cloud. One driver is that, the frequent spend in U.S. has moved from satellite, which means that you need to take down capacity and solution from satellite and move them over to cloud. So that’s definitely an area that we have been focused on, and we are glad to see that we have a close relation with one of the major satellite operator, Globecast. One thing that gets more and more important in our product solution is security of the content. When you move over to unmanaged, but also in managed network, but definitely in unmanaged network, we need to have security of the content that are transported and we have launched a new feature we call Facility Connect that give that security -- sorry, facility that gives that security for the content moving in, in an unmanaged network. So a number of new features that we have launched to strengthen our position in the market, which, over time, of course, gain new revenue streams. The major order that we secured in the U.S. reflect the broader market shift that demand for increased capacity at the venues. We have seen that for like 2 to 3 years that the increased capacity will move from the core out to the venues due to the fact that this is more content distributed and many new features and functions and increased cameras at the venues. So this is really one of the key trends that, that we see in the market that will drive our solution and we are focused on the capacity, and as you know, we are launching a 400-gig platform in end this year, beginning of next year, which will strengthen our position. So this order reflects the 40 venues now are installed with 100-gig platform 1060. So that's just a low number of venues that we see in U.S. and a low number of -- this is to an existing customer, and they have a lot more venues that can be installed by the 1060 or increased capacity. And this order were secured in a very high competition, which means that we see that our solutions are really strong, and we can go up against competitor and winning deals like this. So this is really glad to see that the SEK 6 million orders are coming in, and we have started to deliver that in Q2, and we will continue in the second half of this year. And if we look into the high-capacity product, the 1060, it actually have doubled if you see from 2022 to 2026, going from 30% of our revenue to 26% of revenue, showing the trend that you see that high-capacity product will grow over time. And the high significant part of our sales is based on our new product that we have developed, IP-based solution and cloud solution. So that's really taking off, and we see that is a high demand of those products in the market. And as I mentioned, we will launch the 400-gig platform that will secure our strong position in high-capacity offering into our -- to the market -- media market. Moving over to time synchronization. The need of GPS/GNSS independent solution is growing. I know that we have been saying that for a number of quarters, but it's still increasing. And I don't think no operator in the market realized that they need to handle the time synchronization another way that they have done in the past. So that is really obvious when we talk to operator that the need of GPS independent solutions are increasing. But we also see, of course, that the government is also looking into that. Regulator is also looking into that. We see in the U.S. it started. [ FTC ] has started to investigate to see how they should solve this. We see that the EU is looking into the vulnerability around the GPS synchronization. U.K. have started, India have started. So this is a trend that we see going forward that, of course, would drive need for our product. And that's a good trend and definitely is something that we will see in the future increased demand. And currently, we have more than 15 existing customers. We had added 2 new customers during the quarter. And as you can see, we have the same level of order book as we had in Q2. And this is coming on from the customer that we have, which are in the rollout phase had not placed any order during Q2. So that's one of the reasons why we have -- or that's the reason why we have a low revenue coming from the time synchronization. The good thing is that, we see that in Turkey, the license process has started, and we see that they estimate that they will issue the 5G license in Turkey during Q3, which means that Türk Telekom will move into rollout phase in the second half of this year, beginning of next year. So that will definitely drive volumes and revenue for us. We see a very positive progress with customer in evaluation phase or early pilot testing is moving forward, and we have added 2 new major operator beginning testing our solution this quarter. So we have a good trend and a good progress on the customer that are in the evaluation phase. We expect that customers that are in evaluation phase right now, hopefully, will select our solution during the second half of this year and begin the deployment of the network towards end of this year, beginning of next year. We have talked about the standardization quite a lot, and it's moving forward. And the meeting in June was positive, even though that we see that will be completed now in mid-2026. So it's moved forward like 3 to 6 months what we had expected in the past. I will just take some time to present or explain the selection procedure to select a new vendor. And this is a specific process for 5G or network-based solutions. And this is more or less a standardized process that you have for any vendor that 5G operator will add into the network. So if we just go through like the different steps, I mean, it's, of course, start with the sales discussion that we explain our product. And after that, this moving into a PoC, PoC, proof of concept. The PoC is in the lab. It's not in the active network. It's in the lab. It's test the product through specific procedures that we agree with the customer, what type of solution, function, feature would you like to test. We go through the test and show the customer that our products are meeting the expectation from the customer. The PoCs that we have done with the Zyntai for the last 1.5 years have been 100% success rate. All the tests that we have done have been successful and meet the expectation from the customer. The next phase that you're doing is a field trial. A field trial can be combined with lab product, you have product in the lab and in the network. So it's a combination of lab and a field trial – a trial with -- in the open network. And then we had the first pilot installation. That's the first time that you install product into your active network, and it will be in operation into the active network. And as you can see that we have a conversion rate from the PoC to 50%. And that's the number today. We have a number of PoCs that just have ended. We have a number of PoCs that have moved over to field trialed that then will move over to first pilot installation. So this will -- the conversion rate will go up over time. After the first pilot installation, one of the reasons that you have a pilot installation of a number, it can be tens of units that you install is that, you can see how you should do your network planning when you will roll out it in your whole network. Then we move over to contract negotiation. And this is like an installation that rollout will go for many years. The customer need to budget that and the next phase is, of course, rollout. As you can see that we have estimated this to 12 to 24 months. The interesting thing is that, it can vary quite a lot. The order that we just received in Q3 for the field trial, we did a POC in Q2, and we received a field trial order in Q2. So that during the quarter, they moved from PoC to field trial. So that was really a good and very conceive and well-planned activity together with the customer. So it varies quite a lot. We have customers that we have been spending like 12 to 16, 18 months with, could take much longer time. So this can varies between the customer. And we need to understand that the time synchronization is a critical function in the network -- 5G network. And the life span is 5 to 10 years or even longer. So the 5G operator need to carefully select and testing the product because this is very difficult for operators to shift to new supplier during the rollout or after the rollout phase because it will be very costly. Some countries can have regulatory demand that the 5G operator would like to wait and see what demand the regulator will put on to the operator. And one important part is that, the time synchronization for 5G operators is fairly new. In the 3G, 4G network, time synchronization was not an important part. So it's a very few individuals in the operator to have a deep knowledge around the product. It's building up right now, but it takes a little bit more time for the operator to understand all the needs and the specific product specification within the time synchronization. So this is just showing the phases from sales discussion to rollout phase. And as we have 4 customers in the rollout phase, and we hopefully hope that we will add another few in the end of this year. Thank you. I will hand over to Cecilia to take the financials.

So hello. And I will start with our revenue. And for a longer period of time, we have had shown growth, but the growth has been temporarily offset by softened market, increased geopolitical uncertainty and now with FX headwinds, resulting in a revenue decrease, mainly in Q4 and Q1. In Q2, we rebound with revenue of SEK 143 million, and that corresponds to a growth of 24% corresponding to -- compared to Q1 this year. In the quarter, as Crister said, we received one of our largest order in history, and we started delivery during the quarter, and it will be finalized during the second half of the year. Year-on-year comparison is affected by the nonrecurring software deal of SEK 30 million that we had last year and strong FX headwinds. However, if we compare in comparable currency and adjusted for the software deal, we have, as Crister said, a growth of 4%. Going forward, we still see there is a hesitant market, and this results in decision-making processes taking longer time and risk of orders being pushed forward. Now revenue and we start with revenue by region, and we see that all of our regions have improved versus last quarter. And EMEA and APAC has stable performance, whilst our strategic focus area, Americas show strong performance continuing from the last year. And on the right side, we have our product groups. And here, we can see last year's high revenue in software coming from the nonrecurring software order. So to our gross margin, and our unadjusted gross margin for the quarter was 68.8% and for the last 12 months, 70%. This is slightly below our 3-year average. And the gross margin has been affected by the FX headwinds, and to some extent, also by the lower margin that we have in the deal that we announced in June. Our gross profit amounted to SEK 77.9 million with a margin of 54.6%. And here, again, the year-on-year decrease in gross profit and gross margin is distorted by the nonrecurring software order. So for us, it's -- our future is very important with innovation and technological advancement. Therefore, we invest very much in our R&D. For the last 12 months, we have invested 25.7% of our revenue in R&D. And of that, 66% has been capitalized, and this reflects our focus on long-term value creation. So going forward to our results and looking at EBITDA, these figures are all excluding the one-off cost of SEK 10 million. So EBITDA adjusted was SEK 23.9 million in Q2 with a margin of 16.7%. And for the last 12 months, SEK 112.9 million with a margin of 20.6%. This is a -- we have seen a decrease in EBITDA during the last quarters, and that is primarily due to the absence of growth we have invested for mainly in time synchronization, along with the significant currency headwinds from the strengthened krona. To counter effect the decrease in EBITDA, we have initiated a cost saving program during the quarter. The program will have yearly savings on SEK 30 million. And as I said, in the quarter, we have generated one-off costs of SEK 10 million from this program. If we look at our EBITDAC and EBITDAC that is EBITDA, including capitalization of the development costs, they amounted to SEK 1.8 million in the quarter, adjusted for the one-off cost. And now to operating margin. And here as well, these figures are excluding one-off costs. Operating margin for the quarter was SEK 0.3 million with a margin of 0.2% and for the last 12 months, SEK 21 million with a margin of 3.9%. And the trend of the operating earnings and the explanation of the decrease that we had is the same as for the EBITDA. We expect the operating earnings and EBITDA to increase during the second half of the year. Net cash. We have had a negative net cash of SEK 58 million during the quarter. And if we start with cash flow from operating activities, they were negative with SEK 34.6 million, and that is mainly due to the one-off cost of SEK 10 million and then the increase of working capital we have had of SEK 39 million. Cash flow from investment activities amounted to a negative of SEK 23 million and cash flow from financing activities amounted to SEK 1.3 million. Net cash position at the end of the quarter was SEK 98 million. And if we include our unutilized credit facility of SEK 50 million, we have available liquidity of SEK 148 million. So back to you.

Thank you, Cecilia. Yes, to do the summary, we are so glad that the media revenue improved during the quarter, but we still feel that the market remains uncertainty with the risk that we can see delay in orders, but the activity level in the market, the media market is very high. So we continue to see a strong demand for our product and service, both in media and synchronization. Glad to secure the large media deal that really demonstrate our competitiveness and strong position in the growth areas. And the growth areas is high capacity that we are investing in the 400-gig platform coming out in the end this year, beginning of next year, IP-based solution that we have invested in the last 3 years and remote production that we have been involved in for many years. Full-time synchronization see positive progress with customers in the evaluation phase and early pilot testing. And we see that some of the customers that are in that phase will select our solution during the second half of this year and beginning deployment towards end beginning next year. The first order on -- in the media market for the time synchronization is a good sign that we have the product right now in the market because we are strong in the media industry that we will definitely see an opportunity to gain more revenue coming from that market segment. The field trialed order from a new 5G operator in North America is very positive. And we have 2 new major operator beginning testing during the quarter. To ensure continued financial flexibility in light of the ongoing macroeconomic uncertainty, the Board have decided not to utilize the share buyback mandate granted by the Annual General Meeting for the time being. We entered the second half of the year with very good confidence. We see a healthy, strong market activity with strong engagement from our existing customer in our product and a new customer that are looking into our portfolio. And the time synchronization is definitely something that we see a strong demand in 5G, but also in critical networks. And the financial targets, the long-term financial target we reiterated. Okay. Thank you. Before we move over to the Q&A, we will like to invite all of you to Capital Market Day, the 29th of September. It will be from lunch and in the afternoon. And I hope you will read our new issue with Open Insight that we sent out today. So it's brand-new that will give a little bit more broader view of the things that we have presented today. Okay. Thank you, and we move over to Q&A.

Perfect. Thanks a lot, Crister and Cecilia. [Operator Instructions] I think I'll start then going from top to bottom basically, starting with the media side and the large U.S. order that you started to deliver upon in the quarter. Is it possible to give some more flavor on the phasing of that order? How much has been booked and how much is left for Q3 and Q4?

I mean, we started to deliver during the quarter, and we will continue in Q3, Q4. We haven't given any more detail on that because, I mean, we are always looking into how we should ship the different orders that they are coming in. So it's not like looking into one order unit, you see the full picture, how we are making sure that we are meeting the demand from the market. So we have started to ship but we will continue in the Q3, Q4. So we haven't been giving any more details on that into the market.

Okay. And if you see the demand, if we exclude this order in the U.S., has there been any shifts and more positive sentiment among the customers during the quarter? Because the performance, the recovery from Q1 to Q2 must be from other places than this order.

I mean, as you saw already and communicated in Q4, we saw a little bit slower market in EMEA and APAC, but we saw a continued strong demand in the U.S., and we see now that Europe, EMEA have been coming back with a strong number. And we have received some good orders in EMEA, more than SEK 10 million orders, that is a good sign that our customers are willing to invest quite large into the network that they are running. So it's both build-out of network, but also, of course, customer -- our customers they are winning new deals in the market and place order to us. So we see like a broad number of customers that are really active. So we don't see that the orders or the activities moving away and disappeared. They are in the market. It's just when they decide to place the order. So I think that it's very good and strong demand in Europe. You can see U.S. have been growing in the last 3 quarters. APAC have been stable on like around SEK 20 million level. But we see the activities in the second half is strong in all regions and it gets stronger in APAC as well. So we have a good view and a good feeling for the second half of this year.

Very good. And you mentioned the 1060 platform being in this new order, and that is high capacity. Is there a way to see the penetration, the need for additional capacity? How far have we come in terms of upgrading to higher...

Yes. I mean, actually, we have just started. We have seen that and been working to move out the 1060 into the venues. I mean, it has been a core product mainly if you look in the past. But this is the first major move into -- it's more than 40 venues that have been installed with our 1060. But if you look at the number of venues in the U.S., it is hundreds. So this is just the beginning. And I haven't seen any other competitor or other customers that have done this large investment. So this is the first one. Hopefully, it will drive other to invest as well because this means that this customer will have an advantage of delivering new features, full HD and other solution to the customer that they have. So that hopefully will drive other customers as well start to invest more in the high-capacity at the venue. So this, I think, is a start of a long-term trend that we will see increased capacity at the venues.

And can you just remind us how the structure of a deal like this looks like? You have an upfront rollout of the equipment and what happens then?

I mean, we have like a CapEx, like revenue that is like the SEK 60 million. But based on that, we have support recurring revenue and license based on that. So this will be -- the SEK 60 million will have recurring revenue going forward for the next 5 to 10 years probably. So this is ongoing. So that we are building up like a larger base of equipment that we will have license and support based on. And if you look at media, it is all the way from 4% to 8% license and support on the media products. It's higher on the sync. So that is the recurring revenue. And if you look into that, you can see that over time that the recurring revenue had gone up. A little bit hard to see because it's a little bit varies between the quarter because we have other than just support and license within the service.

And that brings us into the sync product. And we have a question if you still see the ramp-up for the sync unit during the second half?

Yes. I mean, we are basing that on the phase that the customer are in that I tried to explain a little bit more the different step. And we see that customers are coming through that process. And hopefully, they will take the decision to select our -- us as a vendor, and then they will start to deploy the product. And so, that's -- we are like measuring that the step that they are taking, and that's the reason why we have a hope that we will see orders coming in, in the end of this year and the deployment will probably start end this year, beginning of next year and continue over many years. So that will not be a huge order from start. It will be ongoing orders per quarter, as we have seen from Türk Telekom and Tre in Sweden or [ Telecom ], they order gradually through the quarters while they are building out the network.

And, I guess, the timing of the license in Turkey is a concrete example of it…

It's definitely -- and we should remember that it had been delayed with more than 2 years. So we expect it actually to start to deliver that order just in the beginning of 2024 and 2023. And now it's coming out in the beginning of -- end '25, beginning of '26. This is like 2 years delayed. And that's also we were planning to have the Türk Telekom order moving out while we were building up new customer and handle the cash flow and EBIT level with the Türk Telekom. But hopefully, they will get the license in Q3, and then they will probably start in Q4, Q1 to roll out the network.

And we have another question from the audience. Given the weakness that we have seen in the past couple of quarters, how will you reach the targets for 2027? And how much of sync revenues are needed to reach that, especially the margin target?

I mean, the margin target, I mean, of course, we are investing heavily into sync, and we are not balancing that with revenue, the cost that we have. So that will take a good portion of moving us to the 20% EBIT level. Revenue-wise, definitely, it will take a good portion of -- continue to increase to the 50% that we have per year until 2027. So that will be an important part starting for next year to really gain that. I don't know if you would like to add.

No, it's correct. I think that us reaching the target time synchronization, time sync needs to earn more money, revenue, so that we can have breakeven and starting to get positive results.

And on that, assume that we get some better recovery in the time sync unit and that volumes come in, in 2026, what happens to costs when you start to roll out...

Look, do you mean gross margins or do you mean by our OpEx? So gross margin-wise, we have -- the product groups are quite similar in gross margin. As Crister said, the support and license fee are a bit higher in time synchronization. And that will, of course, in like a longer period of time, make that a bit higher, but that will be in several years ahead. Looking at our cost structure, we have invested for -- the organization we have for time synchronization has been invested for and we should have been had more growth in order for that organization. So, I think that if it starts to get off, we will -- when we get more rollouts, we will need to invest a bit more in the organization for time synchronization in order to meet support in all countries where we are. But it won't be a like huge ramp-up. So we have a stable OpEx. It's going to be going down now with the cost saving. But if we have a large increase of revenue, then, of course, the OpEx will need to increase as well a bit.

And on the restructuring, have you taken all the costs for that program?

Yes. All the one-offs has been taken during Q2. And we have started to have some savings in Q2, but they will be showing more in Q3 and Q4 and then full effect from Q1 next year.

Perfect.

Yes, in the rollout phase with a customer like Türk Telekom, we need to support them. But that will be a service that we have that we will charge them, of course, for. So we will need to build up resources to support a larger rollout, but that will be a service that we actually are selling.

Yes. Can you comment the interest from system partners? Are there dialogues with larger providers like Ericsson or Nokia to integrate Zyntai in broader solutions?

I mean, that's interesting to see that we have the opportunity to do that. I mean, we can, over time, maybe see that we can virtualize our product and that they can integrate it into other products. I don't see just this is Ericsson or Nokia or telecom suppliers that will be interesting in that. I see a number of other that can be interesting to use our software in other applications than just 5G as well. So that's an interesting thing, and we haven't started to look into that. But going forward, that can be something that we will look into and see if we can do it more of a software-based product, which can be like integrated in other products.

And on cash flow, it has been negative now for a couple of quarters, and it takes its toll on the cash position. Should we be worried about this? Or do you see that this trend shifts [ in this quarter ]?

Of course, if we see like for the last 3 quarters, the main -- the result has -- the negative result has, of course, impacted the cash flow. Right now, the cash flow is mainly due to a buildup in customer receivables that we will get paid during the second half. So that will improve the cash flow. Then we have the FPGAs that we announced last year that we are to invest in. We have received them. So if we look deeply and look into our balance sheet, we can see that we have an increase in our inventory. But on the same hand, we have an increase in our supplier credits. So that will be paid during Q3, and that will affect the cash flow. But going ahead, we will have lower costs for FPGA. So that will possibly go well. But I see that we should be improving our cash flow as from second half of the year as well.

And the FPGA is for our volume product, the 1060 with all the cards that we have in that product need an FPGA. So that's the crucial components that we have. So that will increase the cash flow going forward when we're using that investment that we are doing.

Good. And a final question. You touched upon it earlier that you have 15 customers in pilot projects. What's the progress on those 15?

I mean, they are in -- as I explained, they are in the field trial, and they have also invested in our product and install them in the network. So they are those that we move over to a more rollout. And we actually have more than 15 because we added 2 new this quarter. So we have more than 15. So that's the -- when we are looking into that, those are the customers that we see that they are moving forward, and we estimate they will be ready to take decision in the second half of this year and start to rollout.

Very good. I think we covered most of this. So thanks a lot and good luck in the second half of the year.

Thank you.

Thank you.