Enea AB (publ)

Thank you very much. Good morning, everyone. Thank you for giving me this opportunity to walk you through our Q1 24 numbers. I'm here with my CFO, Ulf Stigberg. We are going to follow a normal agenda we have. That will cover a short introduction to the situation, our financial numbers, We'll talk a little bit about the development we see within cybersecurity and then briefly discuss our outlook. So Enea, I'm sure you know Enea. You might know the vision we have to make the world's communication safer and more efficient. You might not realize that four and a half billion people are relying on our software on an everyday basis. And most of these four and a half billion people don't know about it because we are working in the networks that are hovering around the world. And we make sure that we connect the companies, the people, the devices and the things that are communicating with each other on a worldwide basis and what we do is we optimize and accelerate the traffic and we protect the communication from fraudulent interference from other parties but the main theme of the day is not the vision of the company it's the numbers and it's the quarterly numbers that we're presenting here and given the circumstances We're pretty proud about the quarter. So if we just for the one-off we did last year, we have high single-digit growth numbers in our total business of 200 million in net sales during the quarter. We have an EBIT margin, EBITDA margin of almost 30%, which is very close to the yearly target we have of 30%. So we did 29% in the quarter. We have increased our earnings per share with 10% to 0.52 kronor per share. We have a record cash flow of 120 million Swedish. That's the second best cash flow in Enea going back a long, long time. If you look at our investments, so we don't do this by strangling the investments we do in our future. Instead, we're doing this while comparing to Q4, actually increasing slightly the R&D investment as a percent of sales. And that's obviously because the sales is a bit lower than Q4. So we're now investing 26% of our sales, reinvesting that in R&D. Going into this year, we've done some changes on our segmentation. We have been asked by the investor community to try to be a bit more transparent of our business, try to explain it a bit more. And we took a major step for Enea to change our segmentation from two segments to three segments. I understand that it might not be a super big step, but it shows our business in a bit more granularity and it also allows for a conversation around the segments that is a bit more granular. So in our network box or segment, we have our products that obviously work to optimize and accelerate the network and the applications for the network. In the security side, we have the security products, both for network, as well as for enterprise. So it's in the security side of our business, you have the majority of our revenues coming from the outside of the telecom industry. And the OS segment is self-explanatory. It's our operating system business. And beside the cash flow and the decent EBDA margin, the main takeaway from the quarter is that we're back to double-digit growth in our network segment or 10% growth year-over-year in our network segment, and almost 10%, more precisely, 9-plus percent growth in our security segment. So that is very much what we've said over a couple of years now, that we want to have double-digit growth in our focused areas. It used to be one segment. Now we split it up in two segments. But this quarter, we actually do have close to 10% combined growth in this segment. So we're very proud of that, given the fact that the telecom market is still pretty softly And the growth is not driven by new single large deals. Instead, the growth is driven by an increase in our ongoing recurring revenues. So what's happened also under the hood during the quarter is that the stability in our business actually has been growing. The overall market in telecoms, according to DeLauro, shrank last year with 11%, and the same analyst firm is saying that they expect a continued decline during 2024. Now the RAN investment market is not precisely the definition of where all our business is going in, but it's a very clear indication of the investment situation in the telecom industry at large. The difference for us is that we have a big part of our business focused on security, and security is a very healthy market, and we'll come back to that in a minute. And the other piece of our operation is focused on improving or optimizing traffic without doing large investments in hardware in the RAN market. So from that perspective, we are in a good spot, but let's remember that the telecom market is still soft. So with that, I would like to hand over to our CFO, Ulf, and he will take you through our financial results.

Thank you, Anders. INEA reports a net sales of 200 million SEC today. This is driven by stable sales from our current customers, including capacity increase, additional functionality, and further on. Also, we have a high renewal rate of recurring contracts, including both support and maintenance term licenses and recurring professional services. The 200 million in sales is achieved also without any new major deal in quarter one. And it's important to stress that fact that we produced the 200 million even without any big one in quarter one. Compared to previous year, we report the growth of 7% when we adjust for the buyout deal in quarter one 2023. And we think this gives a better picture of our underlying business comparing ongoing business with Q1 2023 without the buyout deal. Total revenues for the quarter was 206 million compared to 254 previous year, including the buyout deal. Looking at the different segments, the operating systems following the plan, we have a license revenue lower than previous year with 17% if we exclude the buyout deal. And we have a stable and steady development of the support maintenance part. The professional service is quite limited within this segment. Going into the security solution segment, we have solid growing recurring revenue. License revenue compared to previous year was stable. We have a 17% increase in support and maintenance, and that's partly thanks to increased installed base, but also higher rates for specific deals compared to previous year. And we have a 26% increase in professional service within the segment security. Going into the network solutions, the renewal rate of recurring contracts in all categories of revenues is good, including key operators in both Europe and North America. And having said that, we have renewal or we have recurring revenue in all categories, so it's not just support and maintenance. Within the category license revenue, we have a 58% increase compared to previous year, and this is based on expansion and new deals for the quarter. Within the support and maintenance, we can see a minus 10% adjustment or drop, and this is mainly explained by positive adjustments in previous year and negative adjustments this year 2.8 minus 1.2. So it was a little bit hard to make this comparison, but the underlying business is stable and overall recurring revenue is growing for INEA. Within the professional service, we have a 90% increase compared to 2023. We report a EBITDA result of 58 million. And this is the result of the cost adjustments we introduced or performed in 2023. And we can see that this pays off now. Even though we have 200 million net sales, we report 58 million on EBITDA margin. calculates to 29% in relation to net sales. And this is an increase from 18% previous year if we make the adjustment for the buyout deal. Looking at the operational expenses, excluding the depreciation and amortizations, we have an amount of 100 million roughly compared to 109 million previous year. And in the details, we can see that the operational expenses spend decreased from 139 to 122 for this year. And we have made some adjustments in the capitalization of R&D costs going from 30 to 21 million this year. In this quarter, we have a strong cash flow. This is generated by a good EBITDA results in combination with a good change in working capital. We have received good customer payments and this results in a total cash flow from operations of 120 million compared to 97 previous year. The positive cash flow results in a better debt position and the net debt for the quarter ended at 133 million compared to 263 million previous year. So we have a change of 130 million over the year. The financial KPIs equity ratio 65.8% and the change is mostly related to the reduction of equity related to the write-downs previous year in mid-2023. And we have a sound level on that net up to EBITDA with 0.74. The buyback program will be repeated and continue after this report. In Q1 2024, we bought back some 245,000 shares with a total consideration of 13 million SEK. And based on the cash position, the board decided to continue with the buyback program until the AGM in May 7th. And the program will be carried out by a credit institution following the safe harbor regulation.

All right. Thank you so much, Ulf. So let's talk a bit about the cybersecurity market. And to do that, I would like to start with Mobile World Congress. Mobile World Congress is happening every year in February. And post-COVID, we're now back to over 100,000 attendees this year, of which more than half of them comes from adjacent markets to the telecom market. The wider mobile ecosystem, cars, robots and other types of companies are in this venue. There were 2,700 exhibitors and 180 delegations with ministers from different countries were there. At Moevo Congress there is no depression in the telecom market. Pretty much the contrary. There's a lot of activity happening here, and I would call it boom time for the telecom industry. We discussed this yesterday at the board, and the wise man in our board said, well, every time you go to an event, of course, you need to go there full of energy. And that's true. But if you go to an event in a market in decline, you might find some empty spaces, some empty places and not everybody going there. And that's not the feeling you get when you go to mobile Congress. And I think that's correct, because this industry is what creates the foundation for the way of life we have today. We have today from waking up in the morning, looking at your social media, to going to bed in the evening, working some late night meetings or late evening meetings with friends or colleagues in another time zone, or watching your favorite series on your mobile device. All of this is created on the foundation built and invested in by the telecoms industry. That's also very clear when you look at INEA at Mobile World Congress. Never have we had such a great event. Never have we had so many C-level meetings, so many concrete discussions on how to make your network either more efficient so you can generate more revenues or more secure so you can make sure not to lose revenues and secure your customers. Security was a key topic not only for Enea. Artificial intelligence was a key topic not only for Enea Revenue growth was a key topic. And also from how to protect this from all kinds of different aspects was a key topic at Mobile World Congress. And the protection is something that you can't stress enough. So before Mobile World Congress, we did together with the communication arm of Mobile World Mobile World, a company or a unit called Mobile World Live, we conducted a survey of all the people, customers, companies in the database on how they view security. We divided this in the enterprise expectations, so not the operators, and what you see here in orange, the operators. So if you look at the enterprise expectations, they say that, or half of them, 47%, say that the operator is the most important cybersecurity provider for me. Also, the same amount of people, 50%, in this case 51%, said they require the operator to provide firewall protections. And almost 60% or plus 60% said, that they are experiencing significant costs for securing their communication with their customers. And this is cost in increased investments and cost from increased losses. So it's both a plus and minus game. The operators said that We will invest in SMS or multi-protocol firewalls over the next year. More than half of the operators will further their investments. 37% will further their investments in signaling firewalls. So we at Enea, we both do messaging firewalls and signaling firewalls, or you can order voice firewalls. Those are different protocols in the network. And almost half plan to invest in threat intelligence services. And you can compare that with the banks. Many banks in Sweden now have a unit looking at the usage of, for example, your credit cards. In telecoms, we in EIA, for example, offer service where we can intelligently look and analyze both human and with the help of AI the traffic in your network. We invite you to a call to arms during 2024 to combat cyber security issues. I encourage you to download this material that we have put together. You can learn about voice frauds. You can learn about how artificial intelligence and deepfake biometrics will fool you even easier or with greater sophistication than it did just you know, a short time ago. We discussed how artificial intelligence is inflating traffic, and the inflation of traffic is not necessarily, at least not directly impacting the individual, but it's for sure impacting companies. Inflating traffic might cause you either a skew picture of your operation, might enforce your cost, and might also take away revenues from operators and give less paid revenues to other operators. You can also learn about the new EU Digital Networks Act. This is not something only discussed within the telecoms industry or between Enea and our customers. This is something that is discussed on a regulatory basis. and there is a new EU Act just out recently, and it will fuel investments in this space going forward. When we look at Enea going forward, for us it's not only about cybersecurity, even if a lot of our business now is driven by cybersecurity, During the quarter we've also got an award for our IoT offering. It's a cloud-based IoT offering that stands out in the market. It's not about security, it's about how to optimize your network. We have written trends on the network. We've written trends on the telecoms industry. And we're doing this all around the world in different countries. And I would say, almost thinking in different languages, for sure we do. English is mainstream language, but our business is in Spanish. It's in Arabic. It's all over. And we are demonstrating thought leadership. This is a snapshot from the last 90 days. And you will see the next similar snapshot during the 90 days to come and during the year to come. Our long-term ambition, we've said this many times, is to have double-digit growth in our focused areas. You have to remember that INEA comes from a situation where we had an operating system That was prime time operating system in billions of devices during the mid first decade of this millennium. Then it's been in the mobile network, but now and over time it's been changed to Linux. So that is a declining business. We said that for 10 years and it's a fact. Now this quarter it's 10% of our total business. And even with that being 10% of our total business, we still record record cash flows and we record 10% growth in the other segments. That is something you need to appreciate with Enea. Operating system is going down. The rest is going to grow. In the other business, it's also software business. It's a profitable business. It generates strong cash flows and well-managed. It generates strong EBITDA margins. And our margin target or ambition over the coming years is 35%. And we reiterate this ambition, and we have done that so many times. From a growth perspective, in 2024 we are not immune to the the market or economic circumstances around us we fight them but we're not immune to them and they will impact and i cannot sit here today and say they're going to change in q3 they're going to change second half of this year it's a fact of the matter today the economic surrounding is tough. We work within it and we find growth within it. We find margins within it and we find cash flow within it. From an EBITDA margin perspective, therefore, we can say that we expect in 2024 a margin above 30%. And from a cash flow perspective, we say that we expect strong cash flows for the full year of 2024. So with that, I would like to say thank you and open up for questions.

If you wish to ask a question, please dial pound key five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial pound key six on your telephone keypad. The next question comes from Jesper von Koff from Redeye. Please go ahead.

Hi, guys, and congrats to the very strong quarter, and also especially being back to growth. I think a very long-awaited result. I mean, this comes from both security networks, despite no one-off deal. So could you just talk about the underlying drivers for both of these segments?

Thank you, Jesper. Thank you for the kind words and thank you for your question. I'm not sure really how to add to what we've just said. So the drivers is that there is no doubt that there is massive investments in creating a network where we can all operate our our business and our lives on that's happening uh the thing that is impacting us and that is impacting the January the industry at large is that there are not that many big you know obvious immediate investments uh in new technology that might have been happening uh some years ago. But the investments you've already done, the investments needed to be done to run your network, to increase capacity in your network, to increase spend with your suppliers so that you have the right to have an increased capacity of the software you, for example, bought from Enea. Those types of investments are happening. And that's the basis for the growth to grow the capacity, improve the optimization of the networks. And for sure, you know, there is also investments in new technology around the world, not just as much investments as was happening before. From a security perspective, the growth is driven by you know, basically from much the same, but added on top of that from regulators or by regulators and customers actually putting pressure on the telecom operators to invest and provide better security. And thirdly, from an EIA perspective, we have a fairly sizable part of our business outside the telecoms industry in our security segment. And there we see a slightly different, or I would say very different market with faster time to decisions. You know, if you need something, you buy it. And maybe not as impacted also by the post-COVID work situation where projects take a long time to get implemented. It's difficult to get resource and all these kinds of effects that might be a different topic.

all right all right and and i mean um you obviously talk you talk about a very high interest on the mobile world congress uh what do you have like a feeling there like do like do operators still await a brighter economy uh or are they like ready to invest so it but this becomes a personal nuance to the uh

My answer is my personal answer. I think operators are very ready to invest. I think operators have sunk into a situation now where they're not necessarily so worried about the general economy. They're more worried about or reacting to the actual factual situation that it's difficult for operators to find growth. So even if their customers are growing massively. The expansion of usage of the networks is growing like crazy, but it's difficult for the operators to capitalize on that. And given the fact that it's difficult to capitalize on that, instead of investing heavily in new things, they're trying to optimize the network and invest in things that help them grow revenue and help them lower costs. And that is the bigger problem when it comes to general telecom investment. When it comes to security, it's very much driven by other things and actually the need to invest. So I'm not sure I would say that the operators are waiting for a better economy. I would say... The industry needs to find a better way to share the profit and the gains of the wild increase in the usage of the network. And that, I'm pretty sure, will happen over the coming years.

All right, fine. And then, I mean, you've talked a lot about, like, bringing back the culture of winning. So could you just talk about the ongoing work there, how it's going, and also regarding the ongoing sales efforts, if you're changing anything there.

Yeah, so that is... As you said, I've talked a lot about this and it's ongoing work and it's something that is very important to me. I think it's very important, should be very important to any company. For me, it was a great relief to visit Mobile World Congress this year because I met some of the customers firsthand myself. I had conversations with them, and with having to do that, it became clear how concrete these deals are, how close they are to actually happening. We signed a deal at Mobile World Congress, so that for sure happened. Winning today is more difficult than it was a couple of years ago, 10 years ago. I think winning is difficult in the first place, but it's probably more difficult now in the tougher economic environment that we're working in. And that means that you need to be closer to the customer. You simply need to be better than you were before. And this work on the winning culture also requires probably a different call because it would take more time. But it is something that is very important because the time we invest up to the decision a customer is taking to say yes or no is more or less the same whether they say yes or they say no. So the cost spent on the deal is the same. But the margin difference on getting second, third, and fourth place compared to getting the winning spot is massive. And that's what I've said before, and sorry for repeating it. We need to make sure that those investments we're doing that are costly needs to be done in situations where we're winning and not in situations where we're losing or in too many situations where we're losing because we are going to lose some. So that's an aspect. And what I would like to add, Jesper, to this, now at this school is the fact that when we've won a a deal to help customers and and help ourselves to implement the project and start generating revenues and start generating recurring revenues on the project we've won it's also an aspect of uh you know winning but from a pre from a post sales project management perspective and here we're also working a a pretty difficult market where our customers take a long time to actually implement projects or deals that they've signed with us. It can take years to implement. And that is also a learning experience over the course of the last nine months.

Great. Thanks for that, Carlo. And I was also wondering about, I mean, in the quarter you appointed Osvaldo as president, if it was head of technology or CTO, could you just talk about the main purpose here and if you see any changes being made, either if it's more strategic ones or more operational ones?

Changes in the organization, you mean?

Yes. Or, yeah, that, but also if you see, like, Is the purpose to be more aligned with the market and more like one year that keeps a closer year on several different developments?

So on the question of appointing a CTO or chief product officer, it's about aligning and making more efficient our internal work so that we're not running off in too many different tangents. So it's about efficiency and also about putting the best person we have on the job, keeping things together. So it's about making us play a better game. It's also about winning. So this individual is at this very moment in South America. Last week, he was in North America visiting different customers. We had a team with a customer in North America last week. We have a team with a prospect in South America this week. So we try to put the best team on the most important prospects and customers we have. We're creating not account plans, but win plans for the most important prospects and projects we have in the quarter and in the year. So we try to work, you know, very deliberately, top quality, very razor sharp on the most important things with the best people. But doing that, you also need to have the ears on the ground, as you said, you need to have, your top people need to be very connected to the industry. They need to have a long-term relationship understanding of where the industry is going. So the thought leadership that I discussed on the slides some minutes ago very much comes into play also in the projects and the work we're doing with the prospects and with the customers. Because making a deal with Enea is not about making a deal in a quarter. It's a commitment to work with Enea as a supplier over the next couple of years, maybe five, maybe more years. So to do that and to get that win, we need to make sure that the customer experience a very top-notch company with a super clear understanding of where the industry is going and also a humble understanding of that things might change during this next coming years. But an intelligent conversation with the companies short-term, long-term is very important.

Perfect. And then perhaps for CFO about the gross margin. I mean, 76% or 77% in the seasonally week Q1 and without any one-off licensees is very high. So I was just wondering how you think we should think about gross margin going forward. It's fair to assume like 80% on an annual basis should be something like the new normal.

I think with some more software bigger deals during the year we will report higher margin up on around 80 percent and that that is achievable and a lot of cost within the cost of sales is related to staff in the organization so it's it it relates to the deliveries but it doesn't vary very much so with some more software deals during the year we will um getting closer to 80. okay

And then just one last, I know that you're making the last buybacks on your ongoing buyback program until the AGM on May 7th, I think. But what about buybacks onwards from that? Would you be willing to buy blocks or still only over the public market? Because I think over the last quarters, there's been some severe overhang, if you would say that, pushing down the stock price despite you delivering very solid results repeatedly. If you could just elaborate on your thoughts.

So, Jasper, we take this as food for thought rather than a question that we can answer at this very moment. So, first of all, we have an AGM where the shareholders are going to vote on the board, the chairman. Our proposals, where buyback is one proposal and being able to make issues is another proposal. Based on that, the new board being elected will constitute themselves and then discuss how to implement or not a buyback program. So I can't answer that now. I can't answer your direct question now other than the way I just did. From a buyback perspective, we are generating cash flows as we've discussed. Our net debt is shrinking. we continue to generate cash flow over the next couple of quarters as well, over the next couple of years as well. So what to do with, now it's not excess cash. Let's remember that we have a net debt, but going forward, what to do with the cash? We still think that Enea needs to grow. We still think that Enea both needs and deserves a better and stronger place in the market on a global scale. Our business in South America needs to scale up. Our business in Asia needs to scale up. Our business in North America needs to scale up. So we will always think about what's the best way to invest our money, be it buyback, be it dividend, or be it acquisitions. And that conversation is not a conversation I can... fast forward an answer to you at this very moment today we're doing what was presented uh next quarter after the agm we might do something different but food for thought we we note your your comment we've heard it before sounds good and just just just one one last follow-up on on the mna question i mean

Now you have a focus internally making kind of a turnaround, if you will. Is it time now to start looking at M&A opportunities or is the focus still on the internal?

So we are absolutely still, we're absolutely, you know, being connected in the industry and constantly having conversations with both investment banks, competitors and partners that could lead in any direction. But as I said, at the end of the day, it comes to an investment decision. What's the best thing to invest the shareholders' money in? Is it Buyback of own shares, is it dividend or is it buying another company or is it any other type of merger? At the end of the day, long term, I certainly think that I'm convinced that INEA needs to have a bigger size to compete better and more efficient in this market going forward. So long term, the size of the company matters. but for sure how to wisely invest our shareholders' money is at the end of the day the most important.

Perfect. Thanks so much for all of the answers and good luck going forward. Thank you.

There are no more questions at this time from the telephones, so I hand the conference back to the speakers for any written questions or closing comments.

Thank you for that. So yes, we have some written questions here. One of them was around the M&A opportunities. So I think that I've answered that question. We are nearing a situation where we're debt-free. We're generating lots of cash flows, given the size of the company we are. And we will need to have a conversation in the board on how to best use the cash flow. From a size perspective, again, I repeat myself, I think INEA over the next couple of years need to work on the size of the company to get the better scale and use the opportunity to through scale also continue to grow profits and cash flow. There's a question about If it would be possible to share historical numbers for the new segments and to some degree the answer on that is yes so either we have a conversation offline with With the CFO or we meet in a meeting after this and we can discuss that the There is a question that reads, some industry players in near-term growth in network API segment, which should be attractive segment for cybersecurity. Do you see any potential in that segment? I couldn't answer that question in any greater detail. Sure, there are some areas in the telecom industry that's growing better than others. And sure, our security business, as discussed during the call, is growing better than others. But it's not the segment where we specifically would analyze any different growth potential rather than others. than anything else. What I would say, and what I didn't cover in the call, is that we, six months ago, launched our threat intelligence SDK product, and then we're selling outside the telecom industry. And here, we would argue, and we could have a conversation about greater growth prospects than within the telecom market. I think those were the three questions we have here. So with that, I would like to say thank you so much for this opportunity. Thank you for listening in and hope to talk to you again soon. Thank you and goodbye.