Ovzon AB (publ) (OVZON) Earnings Call Transcript & Summary

Welcome to the Ovzon AB Q3 Report. [Operator Instructions] Today, I'm pleased to present Ovzon's CEO, Per Noren; and Ovzon's Interim CFO, Pal Jernhag. Please begin your meeting.

Thank you, Annika, and good afternoon, good evening, and good morning, depending on where you are, and warmly welcome to everyone that have called in to participate in Ovzon's Q3 report for 2022 and our interim report for January to September 2022. I'm joined today by our interim CFO, Mr. Pal Jernhag. Pal is not new to us at Ovzon and he's not new to being Chief Financial Officer and he also has a background as a CPA. So he is a known entity to us and has stepped in here as our previous CFO, Johan Brandt, recently joined another company and our new CFO, Noora Jayasekara is on her way. And so thank you for joining me today, Pal.

Thank you. Good to be here.

Thank you. We're excited to talk to you about the business today. And we find it to be the best way for us to present the business and the performance and then allow plenty of time for questions and answers at the end of the session. As noted, you can ask questions directly via moderator Annika or via the chat box on the website. So without further ado, let's begin there. There, you have a picture of us as well. So you know who's actually talking to you since this is not video -- done in a video mode. Well, let's talk a little bit about Ovzon, shall we? I think it's important to always go back to what the roots are, or who we are, what we do, et cetera, et cetera. I would say this. We have a new vision statement. So I've been at the hub of Ovzon now for 1.5 years -- about 1.5 years. And coming in and looking at what our company is doing and working with our leadership team, our customers and our partners, it's still very clear to us that we've changed our vision somewhat because we wanted it to be even more customer and solution-focused to better reflect what we actually do. We are a company and a solution provider that delivers integrated solutions for organizations with critical missions in any part of the world where they actually need guaranteed ways of communicating, sending, receiving data and information in a secure, resilient and high-performing way and all the time being mobile. You can think of them as you will see on some later slides as defense, emergency rescues, public safety companies, humanitarian organizations, health organizations. But it could also be critical organizations for society such as media and broadcast and other things. But they are all on a critical mission where they require 100% guaranteed uptime with high data rates, high mobility and high resiliencies you can actually perform your task at hand. And I think it's geared us towards something where we're very unique in the world, which you'll see as well. As you can see, we are in a very strong trajectory with increased service revenue that arrived I think month by month, quarter by quarter, year by year. And over the rolling 12 months, you can see that our trajectory is pointing upwards. We'll come back to that, obviously, a little bit later, but note that our business model was more of a subscription-based service revenue mode is making planning and execution of the business easier than in previous years where it might have been a little bit more lumpy on the revenue side. So we're very pleased with that performance and that change. We delivered very well on the orders we took in 2021. That's why you see this trajectory. We'll also come back to that, obviously. Our CapEx is foremost related to the satellite we're building, Ovzon 3, the onboard processor and the next-generation of mobile satellite terminals as well. We'll come back to -- in-depth on that as well. Where we operate and who we are, that we are on Nasdaq Stockholm has obviously not changed. But I think the balance between the customer base and the revenue base coming from the United States and from Europe is mixing in a different way than it just -- than it did a year ago. So we'll mention a little bit on that in a few slides as well. Let me move to the next slide here. There we go. So as I spoke about, our unique solution where we are the only ones in the world actually providing this quadrant, if you might say so is unique from a couple of perspectives. And I won't go to the point there. But if you look at what we've numbered 1, 2, 3 and 4, there is no one else in the world that today both provide terminals and we grew up -- the company was actually founded on the technology and foundation of understanding how you could receive and send information and connect to Internet on the ground. So we're very, very strong, both from a technology standpoint, from a performance and delivering service standpoint on what that means. And our technology has then led over to how we acquire network, satellite capacity in #2 and also the decision to then, of course, launch our own satellite. The key with launching our own satellite is that we understand the necessity for our customers with this guaranteed communication. So we picked satellite systems or satellite capacity that has most of the times steerable beams that can be directed to specific area or region. And sometimes, we also blend that with regional beams that are more fixed in its coverage over a certain region. The difference between the 2 of them is really that you get higher concentration of energy and throughput if you can steer a beam towards a specific region. But some customers don't need all those volumes of data, so it can be blended with what's called regional beams as well. Our own satellite, which we'll come back to, will have 5 steerable beams, will have the onboard processor and will have, as you'll see at the end of this presentation, a new terminal we're looking at where you can -- will be able to build in a much more resilient way of operating and communicating. Number three in this picture, we have chosen not to own and control ourselves, but we are extremely selective in who we actually choose and who we partner with to work with on where the signal from the satellite goes down and connect to Internet, the so-called the gateways or the teleport providers. We have a handful of those that we selectively choose and we pick them in parts of the world where the customer base needs it or wants it or where we get the highest performance from those. And then four, which is last but not least, is our own ability to put these networks together to create the service delivery solution and to build that up for an integrated solution where you have high throughput to the smallest terminals and we can deliver on those critical missions for our customers. So it's very, very strong, very unique in the marketplace. I think it's important then to really take the new vision statement we have and really detect who do we actually deliver our service to, who are interested in this service. And we'll come back a little bit to the trends in the market in just a few minutes as well. We are foremost focused on organizations within defense, emergency services and rescue services and public safety. That's I said, but also humanitarian organizations. They are -- the first 2 are obviously, most of them, I would say most of them in the government sector. So we're in a government sector procurement process where we operate today because that's where the demand on those kind of things are most adequate where we can stand out uniquely as a service provider. But there are also other types of customers that could be there, as I mentioned before, media and broadcast, which we've done. We've done big events like Giro d'Italia, et cetera, et cetera. So there is nothing that says we cannot go into more of the commercial organization. However, I find it's very important because it takes time to build up new markets, new market segments. It's very important to stay very focused, very -- in areas where you can actually create reference customers and where you can build up a base of customers that are actually benefiting from the uniqueness of the Ovzon solution. We sell directly through distributors and sales agents, but we have proven both to ourselves and to our customers that if we stay extremely close to the end user, understand the customer's problem, turn that into a solution and deliver on that, that is the way we win in the marketplace. So that means our sales organization and go-to-market organizations are very -- they either have a background with the customer base we operate within or they are very, very advanced in having done so for a number of years, right? So they know both the technology, the customer side of operations as well as how we deliver those solutions. However, the distributors and agents that we have are important to us because they also have both, as you can see, Airbus having -- of course, being one of the world's largest aerospace companies have access to other types of capabilities and solutions and in the customer base, they operate somewhat differently than we do. So we complement one other well. The 2 in the middle are 2 examples, Bansat in Colombia, where we recently worked with them in delivering solutions to do the election, the Colombian election and connect the users out in the communities where there's no infrastructure or rudimentary infrastructure to that. And we've done United Nations work with them as well in those areas. Gomedia is our Italian partner that is our channel to the Italian Minister of Interior and the Italian Fire and Rescue Service, which, of course, is a big customer. And Intelsat, of course, we both buy satellite capacity from. So we also work with them and their government arm into the U.S. DoD. So it's a mixed picture, as you can see here. There's some sort of coopetition going on as well, but we have very clear, distinct work streams with all of these distributor and agents and they work very well. It takes time. And we have found, again, that being close to the end user is the way where we actually win. So let's turn into -- so that's a little bit preamble to who we are, what we do and how we think about our new vision and our markets and our customers. So let's turn that into how performance was during the first 9 months and in the third quarter of 2022. I would say that, first of all, and we'll come back to it and Pal will talk more about the numbers. But Q3, we continued what we did in the beginning of 2022. We had a 63% growth in revenue from -- and we recorded SEK 78.1 million in the quarter versus SEK 47.8 million in the same quarter last year. Year-to-date, we have a growth of 117%, and we recorded SEK 255.9 million versus SEK 118.2 million in Q3 -- or year-to-date in 2021. Operating results also improved from last year at the same time. You'll see the numbers in a minute, but I thought I'll do it here because the trajectory of growth is very important and driving profitable growth is very important to the company, which will lift us to higher profitability going forward. The one thing that is hampering the operating -- the result is the still unused or you could say unsold capacity of one of the steerable beams we invested in a few years ago from a strategic perspective to kind of bridge where we were into getting Ovzon 3 launched and utilized in orbit. It's also a strength to have this unused capacity as the market will pick up and pick up here in a little bit, we believe, which I'll come back to as well. So that's kind of where we are right now. Now going to the next picture, as we said, strong revenue growth, improved operating results, very, very strong ability to deliver. So I cannot underline this more. Our financial performance had to do with a very strong second half or actually Q4 in 2021, which we then turned very quickly into delivery, which turns into revenue and it drives our operating results up towards the levels we want to be highly profitable in the future obviously. We've had 1 renewal during the quarter from the U.K. MoD for renewal of USD 1.1 million, the renewal of their SATCOM-as-a-Service solution. But let's talk a little bit about the market because I think it's important. There's a lot of activity going on in the marketplace. And obviously, the world we live in today is quite complicated. We have the unfortunate war between in -- Russia invaded Ukraine obviously. There's a lot of activity there as well. But we have to note that none of the NATO or surrounding countries are actually in Ukraine or in the war. They're all kind of supporting the war with different means and capabilities. I think, to be honest, our sales would have looked different had the -- these countries and nations been involved directly in the war. But right now it's more of in a setup mode to support Ukraine and focus on being that supportive organizations. However, we're obviously working with talking to and doing demonstrations and in discussions with most, if not all, of those countries within NATO and the surrounding countries and looking at how you can become -- you can set up a standard satellite communication solution and that standard could, should and would be, I think, in the future, be Ovzon. So the activities are very strong. I will say that there is also an education going on with decision-makers in the marketplace because both procurement organizations and those that actually sit on the financial side and the monetary side, whether they are government officials or working for government need to understand what high-performing mobile and resilient satellite communications actually needs. You have likely seen the discussions in the press and media around StarLink. And I thought it's probably going to be a question, so I'll talk about it just for a few seconds. I mean, StarLink, we don't see as a competitor. We see as a complementary. They serve the market for consumers I believe and they serve it well. They supported Ukraine early and the Ukrainian government. However, if you really want operational guaranteed mobile satellite communications for the missions you have, whether you're a defense organization or Ukrainian MoD or others, whether you're a rescue and services company or organizations or whether you are a humanitarian organization, it is not likely that it always works as advertised. We can actually, with what I just showed you on that picture, our unique solutions guarantee that. So we've had many deep discussions with those customer bases around that specifically targeting what's happened in Ukraine, et cetera, et cetera. So I would say that we see very positively on the future. We're not fully happy with or satisfied with that we haven't signed any new customers or deals in the period that we've been in. But as you will see in the coming slides, Q4 has always been stronger. That is not a promise. It's just saying that these decisions take time, it's somewhat pushed towards financial -- availability of financial resources, et cetera. So I'm very, very pleased with our organization, engagement with the market and the deep discussions we have and the educational assets we have. Last but not least, I'll say that, as noted in the beginning, our previous CFO, Johan Brandt, left the company here at the end of September. And of course, we thank him for all of his contributions obviously and a business like this is nothing without excellent people. So we thank him. We've had the fortune to have Pal Jernhag join us as an interim CFO, but I'm also very, very pleased to welcome Noora Jayasekara as our new CFO officially starting on November 1. And I'm pleased with the speed of execution here in how we actually managed to recruit someone with such credentials and experience as quickly as we did. So that should be good for the future. Okay. Switching over to Ovzon 3. I've mentioned this already. Ovzon 3 is our own satellite, obviously, that we've designed. It's being manufactured by Maxar in Palo Alto, California, United States. It has, of course, had its churns during the COVID pandemic. As you can see in the interim report, if you've read it, of course, we've had issues that had 90 -- up to 90 satellite programs with a specific part for us, which was the reactor wheels, which we waited for, for a long time or I really should say, Maxar waited for a long time before it was delivered and could be integrated on the satellite. Our own proprietary onboard processors, which basically you could see as a switchboard in space, which is software-enabled, which actually can turn if the teleport gets thrown out or taken out, we can create one of our own mobile satellite terminals as a teleport. And then through the onboard processor, you can then have a closed-loop system of communication and sending data between terminals instead of going back and forth, back to the teleport for the signal. It's a unique feature. No one else in the world has it, that's why so critical that we, in the foreseeable future, get Ovzon 3 in orbit, and start to use this and specifically for the customer groups that we are targeting, and they've actually been part of arriving the requirements for that. The onboard processor has been tested off the satellite. It's now on -- the satellite has been tested and works very well and has passed all of the tests. The satellite is on its way into the what's called thermal vacuum test where it will be for a period of time, then come out through the final check and make sure that it is mission-critical, and it fits all the quality criteria. And then it will be transported and shipped to the spaceport for launch. I will say though that given the pandemic, given the delay, given that there are many satellite programs that have waited for parts, given logistics and coordination, there are external risks that exists, risks that are not kind of in Ovzon's control, obviously, with when it comes to both finalizing satellites, test satellites, getting them ready and then everyone is stacking up to get to the launch side as well. But we have line of sight today of what's going on at Maxar. We have line of sight of some of the other programs, and we are sticking to the launch slot that we've been given. We believe that that timeline holds, and that we're making steady progress towards getting Ovzon 3 in space. Turning into what I've already briefly talked about, obviously, as you can see on this slide, I mentioned it that Q4 in 2021 was very, very strong for us, as you could tell. And then we turn that quickly into delivery, which then builds up the service revenue, as I've also mentioned before. So we are working very, very hard on having a similar result, hopefully, in Q4 when it comes to order intake in Q4 this year as well and then turn that into deliveries and execution of those kinds of services. We've added something in the middle here, which we thought was actually of interest to us and we thought we'll share with you as well. And you can see that the dark bars are the service revenue, you can see how they suddenly now are growing upwards in the right trajectory and direction. You can also see that there are some terminal sales that happened during the second half of last year as well and that we delivered on in Q1 this year, right? But those are not repetitive revenues. Obviously they are the sale of the hardware. Normally, we do not sell hardware stand-alone, hardware being the mobile satellite terminals. But some customers have the requirement that to buy them and control those assets ourselves. And I would say utilizing our mobile satellite terminals in a warzone or in an area that is related to warzone, if you lease them out and bundle them as part of the service, you might not ever see them again coming back. So we are entertaining discussions with customers to own those terminals. And that's why we wanted to show that the service revenue goes up, but there are also in some areas, a bit of revenue coming in for the terminals separately. I would say -- that mention sales cycles are fairly long. We are working round the clock to actually close what we have discussed with the market for a period of time and we hope to show some of that resulting in some strategic business going forward. And with that, I think I'll turn the word over to you, Pal, to -- if you want to comment on this, if you want to go to the next slide for the financial performance.

Thank you, Per, for the presentation. I don't have much to add on your description of this page. So I could go on to the next page, where I will talk about the financial performance here. And in the third quarter of the year, the net sales amounted to SEK 78.1 million. And compared to last year, we improved the EBITDA by SEK 15.1 million to reach a loss of SEK 5.2 million, and that's compared to a loss of SEK 20.3 million in 2021. So it's a great improvement, much expected. And compared to the third quarter 2021, the strong growth of 63% out of which 40% was organic and the difference is due to a strong -- the difference between some service due to the stronger U.S. dollar of course. And the growth, as Per also told you, is driven by the extent and additional services signed at the end of 2021. And year-to-date, we have reported net sales of SEK 256 million and compared to last year in the same period, it was SEK 118 million. And that's a SEK 191 million for the full year. So we're already a bit above that and that sort of thing. And even if you extract the terminal sales you are over the full year last year. The growth is 170% of the year and out of which 85% is organic. So that's that. And the high utilization is -- rate is higher of the lease capacity during 2022 have had a strong effect on the gross profit of course. We can use the unleased -- previously unleased capacity. Year-to-date, we have improved EBITDA by 56% -- million -- SEK 56 million to end up with a loss of SEK 20 million and compared to a loss of SEK 78 million in the same period of last year. So -- and all these figures, you can, of course, read in the report and so -- and what I can also emphasize in this part of that -- is that the cash flow now is about 0 in the operational way and that's a good thing, I think, in the last quarter. Now we can switch slide. So here, we have the balance sheet. And as you see, the most important thing to look here is the cash, it's about SEK 350 million, and you have the property of the -- of some -- most of it is about SEK 1.5 billion. So -- and what we have here is the investments on the Ovzon 4 -- Ovzon 3 is almost done here. So now we have only to launch the one and you can see in the step that goes down there in the CapEx that we are almost there. I can hand it back to you, Per. Do you have anything to add?

Thank you, Pal. Thank you very much. Well, we're going to finish off and go to questions and answers. But just going forward and what we look forward to here, we -- as you can know, we have a very strong trajectory on growth and we continue to drive a step change in profitable growth. And we do believe that we will have higher sales in 2022 versus 2021, and we're also creating a solid platform for 2023. We're working closely with all of our partners to ensure that the testing and finalization for a successful launch of Ovzon 3 is going in the right direction, which I mentioned before. You heard on our new vision statement that we're really focused on customers and markets and technology that are actually driving operational uniqueness from our capabilities where we have the highest value. And yes, there is some education. There is some -- I call it, education. There is some education going on in the market, but we're making very, very good progress when it comes to that as well, which I'm very, very pleased with our organization. And of course, having the right team, having the right people and having the right ability to deliver with high speed and quality is second to none for us. We believe that we lead the world in actually our ability to turn an order into a delivered solution, which should be very comfortable -- it is very comfortable for us from our planning of the company and the financial position going forward. And we believe that there is business to be had for us here in the foresee -- in the near future. And we continue to strengthen the organization and build the team and we look forward to our next quarter. And we, of course, look forward to bringing Ovzon 3 and the unique capability with us. I will mention one small thing on the picture you see to the right and it is not a phase. So we are working on the next-generation mobile satellite terminals in parallel. As I mentioned before, that's very important. So what you see there, the smaller one of the 2, the bigger one is an Ovzon T6. And you can get a sense that mobility is not a phase, it's real life. We have things that fit in backpacks and that can easily be connected to the satellite to high performance. The smaller version, we call Ovzon T7. It will have a dual modem, so it can communicate directly with the onboard processor. But it's in the prototype stage, and we'll do a real product launch here when we're ready to do that. But it will be in conjunction with getting Ovzon 3 in orbit and so our customers can use the unique capabilities of that. So that's innovation in a picture, so to speak. And so with that, Annika, I will turn it back to you, and we can open up for questions and answers. And thank you, everyone, for joining the conversation today.

[Operator Instructions] The first question comes from the line of Mikael Laseen from Carnegie.

I have a few questions. And I'll start with the order activity, if you can. You've already commented a little bit on this, of course, but it's a bit quieter in Q3. Can you be maybe a bit more specific where you see the strongest interest in terms of applications, for example, air, land, sea and coastguard and rescue, the activities in those areas? And also, what regions you see the strongest interest? So maybe we can start there.

Yes. Thank you, Mikael, and thank you for asking the question and being on the call. Much appreciated. Yes, I can make some -- a few remarks on that. Obviously, I think our strength currently lies within the land-based capabilities that we have today. So we see that as being the strongest area of interest, and we see it in defense and in emergency and rescue services. That's really where the majority of the interest is because that's also where we've proven, where we have reference points and where they can actually then verify the capability, not only through our demonstrations, but through talking to other customers. The second area we see interest is, of course, with vessels, whether they are on water or on land, but on vessels, that's what we call on-the-move capabilities that we have. That is increasing obviously and I think customers for the future will have both of them kind of land-based on-the-pause as well as on-the-move. I think the combination of that will be the pulse on SATCOM-as-a-Service for the future. So we see some interest coming from foremost on the maritime side. We have some -- we have made some trials and some work with helicopters as well where we have the capability and solution, we could do that. But that's very early stage. So there's nothing really to say that there is a solution that brings it. But I think it's on-the-pause land-based, it's on-the-move on the maritime side. Those 2 are partly the 2 most important ones. I would say regionally that there is a balance between Americas and Europe, frankly. But there is a lot of activity in Europe, but activity shouldn't be taken for that that's always where things will happen. But given the situation in Ukraine and the geopolitical security situation in Ukraine, some of the environmental impact we see, you can see that the balance is between the America and/or the U.S. and Europe. So it's probably a mix of both of them. That's how far I can go in the discussions. But we're heavily engaged in both regions, for sure.

Okay. Got it. And then in terms of renewals, you announced a few contracts during Q3 last year in August and September, October, I think. One contract was USD 5.9 million or so.

Yes.