RTX A/S (RTX) Earnings Call Transcript & Summary

Welcome to RTX Q3 webcast directly from the headquarters here in [Sony ] close to Alba. And here, we have Henrik Mogensen, CEO in RTX and CFO, Mille Lux. [indiscernible] will take us through the Q3 numbers. And after that, we will go and look what's behind the numbers and the upgraded guidance and the added share buyback program and all those things. But most of all, we would love you to send in a lot of questions. [Operator Instructions So let's get started. Henrik, you start?

Yes. So thank you very much, and welcome to all of the attendees. Yes, let me first give you a short introduction to RTX. Some of you might know RTX, yes. And and some of you might not. So who's RTX? Well, basically, we've been working with developing wireless communication solutions and products for a credible environment for more than 30 years. And our main specialty are three segments where we -- sorry, where we deploy our technology. So one is enterprise where we deliver hipsets and handsets to different environments such as warehouses and office buildings place where you might find our products is if you go to the local grocery store, you'll find these push-to-talk headsets that really enable good customer service and safety for office staff. So that's where you'll find our products. We also have a segment into health care, where we develop wireless infrastructure for monitoring of triple heart patients. So really allowing hard patients to freely move around because they are connected to surveillance equipment wirelessly. It also allows the clinical staff to have a more optimized day-to-day work because you can do centralized patient monitoring. And then finally, we actually also deploy our technology as a chip where we enable our customers to building wireless solutions with yes, secure and wireless technology, and that can be deployed in anything from defense versus bundles, but also into professional audio. And we do all of this in an OEM model. So you won't find the tech brand in the store, but you'll find our partners brands in the store, partners that we've been working with for a decade, the likes of HP, Cisco, Philips, Alcatel, that brings our product to market. So that was the very quick flyover from RTX. And then I'll hand over to Mille, who will lead us through the Q3 results.

Yes. Just in a few minutes, I'll take you through the main results for RTX. The first 9 months revenue went up by 8%, corrected for constant currency. Gross margin increased to 54.8%, up 4.1 point compared to last year, and EBITDA rose by 35% compared to last year. I'll dig a little bit deeper into those numbers just in a second. The last thing that happened in Q3 is that we extended the current share buyback program we had, last year, we approved a current share buyback program of $20 million, and we extended that with another $20 million in the quarter. So if we take the highlights, the next slide, yes. We see a revenue of $150 million for the first -- for this quarter and $416 million for the full 9 months. You see in the graph on the right there, you can see the distribution between quarters and a relatively even distribution compared to last year, but an increased profitability. That leads me to the next slide, which is the gross margin, where we see an increase both when we compare to the third quarter last year. and when we compare to the first 9 months of last year and when we compare it to the full year. And the reason for this is the split between the segments. First, I'll just take you through the development of the EBITDA because with the business that we have, the impact of gross margin very much goes to EBITDA because our capacity cost do not scale at the same rate as our revenue or EBITDA. But to understand a little bit better why this increased profitability is shown in this first 9 months to the extent that it is, I will just take you through the 3 segments, the development in the 3 segments. So we have, as Henrik mentioned, enterprise pro audio and health care and Pro-Audio and health care are the 2 segments with the highest margin. Enterprise is our biggest segment, where we have the largest share of revenue, where we've got solid long-term partnerships, but it's also a segment where the growth in the market is lower than the 2 others. Therefore, when we see a different distribution as we had in the first 9 months compared to last year, where Audion Healthcare takes up a much bigger share. We see that reflected in the gross margin for the whole company. For audio, we -- a year ago this a couple of years ago, decided that we wanted to focus on module business, standardized products, economy of scale, and that seems to pay out as we see here in the growth and health care growth is 1 of our strategic investment areas where we have also seen a significant growth in the revenue. If we -- this leads us then to the outlook where we, this morning, increased our outlook for the year. And we increased mainly on the profitability markers EBITDA and EBIT, but also a little on revenue. The reason for this is that we have -- basically now, we have a solid to go in the quarter, and we feel that we are relatively sure that profitability that we can predict is there. The reason that the -- you can say the interval is still relatively large is the component situation where delivery lead times of components is a big challenge that we are facing. But increase of profitability from -- on EBITDA from $35 million to $65 million, up to $50 million to $75 million on EBIT from $0 to $30 million, up to $20 million to $45 million. And with that, that kind of supports our long-term ambition. So will you say a few words about that?

Yes, of course. Thank you, Mille. So all in all, I think the first 9 months is definitely pointing in the right direction, even though have been impacted by limitations in component supplies. We are seeing a strong market trends. in the segments that we also pointed out in our growth ambition that really should drive our future growth, so both the health care but also the turnaround on the [indiscernible] business. And also as part of the enterprise business, our retail, these push-to-talk headsets are really showing a positive driver. And we see a positive market pull of these. And of course, happy to see also that we're able to turn this into both growth on top line, but very much seen from the first 9 months on the EBITDA and EBIT which I think is so important because that allows us to reinvest into the business, how we see more of the future growth opportunities. So yes.

Thank you, Mille and Henrik, what numbers you got here and an upgrade, Henrik, what are you most pleased with in the Q3 results?

Well, I think, of course, the underlying market pull, I think, is the most really affirmative trends that we're seeing beneath our strategy and our growth ambitions. Of course, we are challenged by the component situation, the limitation of component, but I think that also shows some of our strength that we are able to, even in difficult circumstances, both to increase our earnings because it's not only on delivery capabilities also pushing pricing on components, and that our team that are really working extremely hard in managing this, both with our customers, but also with our suppliers in managing this different situation and still show a 9-month growth trajectory. I think that I think is what I'm most pleased with.

But you could have sold more.

Yes. Yes. If we had unlimited capacity and unlimited component supply, yes, we could have sold more. We are managing that and trying to manage that also going forward in dialogue -- closed dialogue with our customers. so we can align deliveries to customers over time.

And how much more could you have sold in the third quarter?

Well, I cannot give you detailed numbers, but it is -- it would have, of course, delivered a better result than we are seeing on top line, but we are working diligently to be able to deliver that over the next quarters.

And will this -- you're saying you're working on it for the next quarters. But with this problem continue the coming year?

Yes. I think that is a reality. So the root cause behind all of this, there are more, but the main course is really the push for data centers, which is driven by the AI pool, and that really pushes the electronic supply chain to its utmost. So it pushes the ICs, the memory and now even the TCB, so that's in the circa boards and building data centers, they pay a huge amount of money. So the margins on that is higher, and that is telling us. And we are foreseeing that going into 2017 as well.

So how are you working with this?

So I think it's a -- there are 3 main elements that we're working. One is, of course, staying very close to our customers because our customers, they are also major electronic suppliers and even producers. So being in closed-dialogue with them and also to manage the supply and making sure that we can still support that business is extremely important. Having longer forecast because longer forecast visibility makes our supply chain able to manage the situation much better. And that's the second part is really the close collaboration with our suppliers, the electronic manufacturers and the sourcing being very --

If I'm an investor, that's actually a good thing because then you know what's going to happen in 18 months.

Yes. Yes, exactly. Of course, it is.

You know how much you can get and the price, I guess.

Yes. Well, the price is actually a challenge because when we are in this situation, you get into something called allocation, right? So you put an order in, and that puts us in a position to most likely will get it. but there are uncertainties because the situation changed basically on a day-to-day basis. But I think that is also actually pointing to the strength of RTX because we are working with some of the major manufacturers of the world and our customers are some of the biggest companies in the world. And they kind of loan us their leverage so we can navigate in this and also the flexibility in our asset-light setup is I think even though it is a challenge, it is proving a strong part for RTX.

And then Mille, just took us through the numbers. If we look at EBIT, you delivered around $9 million in the first 9 months and why your full-year upgraded guidance is now $20 million to $45 million. So that means that you need a very strong Q4. Mille,, maybe you want to answer that, what makes you confident that business can deliver those numbers.

With Q4, we need a revenue of $170 million to $200 million. That is something that we've done before. As Henrik mentioned, we've got spillover or postponed orders from Q3 -- so on top line, we actually feel even though the uncertainty is really high, we feel this is a confident -- we're confident about the top level. Then we have a structural issue that on the last quarter, summer holiday means that the capacity cost for staff is lower than the rest of the year. So we also feel quite confident on our capacity costs. And as mentioned before, the split between the 3 segments also supports the gross margin. even though the share of enterprise is expected to be significantly higher here than the last quarter.

Yes. And then I think it's actually also -- I think what we are looking at is seeing the effect of our business model in itself because with the asset light setup we have, we can scale the revenue without scaling the capacity costs. So compared to last year, where I think we did 141 million, we're looking into a significant improvement in that. That's what we are guiding. So delivering that will actually also the last -- the top-up revenue compared to last year. A large portion of that will actually trickle down to the bottom line. That's also why we see and clearly expect a good impact of the additional revenue in Q4.

And I know you've been working with scaling up. Are you now reaching the point where you will earn more and more, the more you sell earn -- more per $1 one crown, or $1 or whatever.

Of course, you can say that. But of course, we're also investing into the business. And you can also look at the numbers that we are significantly investing in the business because it's growth doesn't come for free. So we have to invest in building our customers, building our markets, building up capacity and capabilities as, for example, we've done over the last year in health care. And we are seeing that kicking in. And of course, we also have expectation for that to continue.

Yes, you have more than doubled your investments in development from $31 million to $72 million. What are you investing in, Mille?

We are investing in health care. As a couple of years ago, we made a contract with 1 of our key customers in health care, taking over the responsibility, the full responsibility for the products. And that came with also taking over the development of the product so that we have the full ownership. And that is mainly -- that's the biggest part of the change -- the other is that we are investing in a next-generation platform for enterprise which enables us to both have a more secure, more future-proof and more efficient platforms.

And for those who are listening who doesn't know what next-generation platform enterprise means can you tell us what it is?

Well, I'm a finance person, so I'll try to from my point of view. We had recommended just so everybody understanding that basically, what I understand is that if you develop software individually and hardware for each individual customer and don't reuse anything, you spend a lot of time and money. If you create one platform and small add-ons or small apps like we know, then you can still have a customized product but not at the same cost and at a higher security. So it's easier to maintain.

So you can produce more for less. Is that if you should --

Well, we can actually support more customers on the same platform. And then, of course, I think as many of the attendees also now, the requirement for cybersecurity requirements to keep up make sure that we still keep our technology edge in an enterprise business that we've been into for more than 2 decades. So of course, we need to make sure that we still support and secure that business, so we're able to grow with existing customers and also bringing on new customers while being prepared for the context that we live in where cybersecurity is a part of the daily life frame.

And back to the investments that we were talking about from $31 million to $72 million. When do we seriously -- when do you seriously expect those investments to turn into growth?

But I think we are seeing aspects of it, you see the growth rates of 50% year-over-year from health care. That is definitely 1 of the areas where we expect over the next 2, 3 years to really to see that payback we see the platform approach that we introduced in Parade where we really have a scalable business, and we see that trajectory going off. And then we're also seeing in the retail segment where we also, with one of our major customers have really done a close development partnership and bringing that to market is really driving growth. So I think we'll see some of the investments are longer term. I think most investments will see kicking in over the next 2 to 3 years.

And Mille, we're talking about how you're becoming more profitable and you're making more money on what you sell? That's actually the baseline for this quarter. The gross margin has increased from 53. 7% to 54.8%. Can you just -- can you tell us more about this improvement? And will it continue?

In the coming years, I think that what I can say is that what we expect in the coming years is that the share of enterprise of the total revenue is going to decrease because both Podio and health care is going to grow more than enterprise. And since they are the 2 segments with the higher margin, that is -- we're expecting that to drive also growth in gross margin to a certain limit, of course.

Okay. So if we look at the elephant in the room, that's enterprise. It's going the wrong way. how is the future looking for enterprise. And that is headphones. And when you're in little for example.

But I think, yes, even though at -- in the first -- the Q3 and where enterprises today yes, it's -- we call it yellow, but we still see a strong green future coming back even in Q4. And we see -- I think as Mille also said, we have a strong belief that enterprise is a growth market, maybe not double digit, but single-digit growth. And because we have the position that we have where we clearly are the technology leader also had the opportunity to find those growth segments or niches as we've done in retail. So we do believe that we're able to also grow and also profitably the enterprise business.

And for you who is watching who can see the questions are coming in, please keep them coming. It's now is the time to ask Mille and Henrik a lot of questions are just one question. We're happy to answer them here. This back to enterprise, are you seeing signs that enterprise could return into growth to be a growing business.

But yes, clearly. So enterprise as a whole, I think it is going to be a growing business. The core will be steadily growing., but seeing that we are exposed in with these customers like HP, Cisco, that are globally that has a broad solution portfolio, we are -- we have the ability to seek those growth sub verticals. And I think the best example of that is actually the retail headset which is part of enterprise. It's based on the enterprise platform that we're using. We just made it dedicated for the specific use in retail stores. and we'll see more of those. So I do believe combined. So there will be sub segments that might go a bit down, but we'll see -- we will have an opportunity grow other subsegments as we've done historically. And I know you're 1 of the largest in Europe actually making those business-to-business for stores for retail for retail. Do you want to be the best in the world. For sure. Yes. But I think we have the right technology. And if you look into that market, there really is a technology trend. So in many countries across U.S., if you go in, they have like Wake -- take or cold buttons. -- in there. And that really is not fit for the future retail store, which is much more an omnichannel so where you actually both have the online warehouse but also the physical store really can go in and get good customer service. And that actually tries a different type of teamwork between the employees in stores and they need to have their hand free being able to move around, having crystal-clear voice being able to integrate the voice into their back-end systems. So there's a technology transformation going on in that. And that's what our technology is actually leading. So yes, so clearly, and I think with our key partners, we are in the right position really to grab that position as the leading provider there.

And then we have the growth in Henrik Healthcare is growing by 51% and Proto by 42%. And -- are we beginning to see a more fundamental shift in where RTX growth and earnings will come from those 2 segments of 3 in the future.

Yes, yes, I think so. And that's also -- if you look at our annual report, that's actually our strategy. It's really to secure the strong foundation base in our enterprise business. But building a really scalable business model in Prague, which we -- I think we've seen the strong signs that we are delivering on that. And then health care as the -- both the leading in profitability growth but also in top line growth. And I think we are seeing good signs of that, and we are delivering on that, there's a lot of stones that has to be crossed and jumped over before claiming success. But I think we are seeing good signs on it. And I also think -- but for sure, it will also require more investment over time that we invest in the right products in the right markets. if you should choose a health care audio, which one would you go with? You could only have 1 of those Yes, yes. But then you shouldn't work at TX because RTX, but really -- but RTX is really about we have strong technology. We know how to build secure, reliable walkouts and that is needed in many segments. So I think when you buy into RTX, you also buy into that we are very focused in a number of segments where we believe we can be the winner. And that we can -- I think we are the winner in enterprise I'm sure we can be in health care infrastructure for patient monitoring and also in audio where we can focus on the critical communication part. So I think that is actually the strategy. It is that we have more than one growth bets and more than one growth vehicle I think that hopefully also provides some solidity or robustness into our growth strategy.