Net Insight AB (publ)

Good morning and welcome to NetInsight Interim Report for Q4 2023. My name is Kristoffer Fritsson, the CEO of NetInsight and together with me today I have Joakim Tjedvin, our CFO. The agenda today is that we do a short summary of Q4 and then moving into the media update and then further on to the synchronization update and Joakim will then finalize with the financial numbers and then we open up for questions in the end. I'm both very glad and proud to present the best quarter ever in Net Insights history. And it's also a record year for Net Insights. It's the best result in 25 years. So we are very happy for the result that we have conducted in Q4 and last year. We can see that the long term trend of growth and profitability continue. And that is many of the strategic initiatives that actually already take place in 2020. So we have stayed focused on the strategy that we set and tried to really find the growth in the market and invest wisely into the product that we see can give us growth and higher profitability. We're also very happy to have launched a new time synchronization product in Q4, and that's after, in time, and it's after two years development. We also established a framework agreement to Terratom and also started to deliver the first product to Terratom in the Q4. And we have moved into a standardization process for our synchronization technology. I will come back to all of those points later on to the presentation. If we just do a quick summary of the financial numbers, Joakim will go deeper into that later on in the presentation. But we can definitely see that we have had a fantastic growth during Q4 compared with the last year. So the net sales Q4 was over $160 million compared to last year, $125 million. It's a fantastic number. Even the operating earnings have more than doubled since last year and close to $30 million compared with a little bit over $13 million last year. This is the 13th consecutive quarter of growth from that insight. And that's, as I mentioned earlier, it's coming from the strategy and the focus to stay firm and make sure that we invest thoroughly into the pocket group in the market. But we're also glad to see that the pipeline for the order pipeline for time synchronization that increased to 195 million during Q4 compared with 180 in under Q3. We have also shipped product for a little bit less than 10 million in Q4. If we then move in a little bit deeper into the media market, we still see a headwind in the media market. We look at the overall market. It's a little bit more positive thing that's in the U.S. And we can see that on our sales that had increased to last quarter in the US, the sales have moved up. But still, it's a lot of changes in the media market. We can see in the Nordic area as well. But the technology shift towards IP and cloud drive investments among our customers. The drivers is actually that the studios is moving over towards IP. And our customer would like to have a streamlined IP-based workflow from the studio all the way to their customer. And that has cost and also take down production cost and make it much easier for our customer to handle that. I mean, we have, as you know, increased our investment the last two, three years in the media. And we continue to invest into the IP and cloud. And we see that we see more and more standards protocol coming out around the IP. But what we have done that's unique and give us a stable sales and keep our existing customer is that we can offer an integration of our own unique technology together with the IP. So for an existing customer that can gradually move over to IP, keep the uniqueness that we have in our technology. And this new solutions that we have launched in the IP video is software based. which means that existing customer can keep the hardware and just upgrade with software. And it gives us, of course, a unique position among our existing customer that we give them a very, very smooth transition over to IP if they like to do that, or if they like to have a part of the network IP-based and keep our unique technology in other parts. Today can mix and we are fully agnostic on IP or our unique technology. But we can also see that our sales of our unique technology have increased the last two years. Combined with that, we also sell more IP based solutions. So today, we have a much broader offering of different functions and solutions around IP to give us the growth. We started to implement the IPVG functionality into our 2000-series product, the high-capacity product. And during Q4, we have moved that over also to our high-volume 600-series, and we can see on the product mix for media is that the 600 series really increased sales during Q3, Q4. So today we have full functionality in both the high-capacity products and the mid-tier product, the 600 tier product. We're also glad to see that Europe, the last two quarters, have really increased in sales. And we have been taking some larger orders in Europe. For instance, in Spain, we delivered a quite large order based on EPVG functionality. And if you go back a few years, normally a large order was one to 10 million orders per quarter. now the last year we have had a number of 10 million order coming in and even larger order than that what we have done we have increased our expertise around the ip and cloud those in the front end the sales but also on the product management but also specific specialists from ip cloud which had helped us to deepen the collaboration with our customer partners. And we are much more earlier into the sales phase now than we have done previously, which means that we can work together with our customer partners to define the network, understand the customer need, and through that, we get a much more stable and predictable sales. And we can see during 2024, the average sales deal or average order had increased up close to 20%. Moving then over to our time synchronization product. As I mentioned, we are so glad that we have signed an agreement with Terecom. The network that Terecom has is a critical network, and we see an increased interest from the critical network globally to move over to GPS independent solutions. But we also have received an order from three in Denmark. And the order that we have received from Terracom will be delivered during, we started last year in Q4, but it will be delivered during this year. As I mentioned, we have commercially launched our new Syntax Syntide product. And we have done the first delivery, also Terracom as I mentioned, through Sweden and to Terracom. We have started to ship smaller volumes into the market. We announced last year that we have been in a relation and cooperation with a major American operator, and they did the first trial that had moved over to a commercial trial in Q4. And that also, of course, is successful first testing of the product. The standardization of our technology that we are using in our synchronization product have started. And if you look into the telecom industry, all operators, the market within that segment are used to have standards and basing the network on standards. So that is like an important milestone for NetInside really to start the standardization of our technology. And that's done through the ETU, the Telecom Standard Forum. And that started in the end of last year and will continue during this year and will be probably hopefully ready next year. And that, of course, creates an increased reliability for our product for the customers that are interested to buy our SynCy products. So that's an important part of our launch of the new technology and our product to get it standardized. As I mentioned, the order book had increased from 180 to 195, and we have gradually And we will readily deliver the order book in line with the outrolling of new network for the customer and the expansion that they have of the network. So it will be a gradually delivery of the order book over a few years. As we have mentioned earlier, we are We have a POC with a power grid company in Europe. And we are still ongoing with that POC. But we see also other power grid companies started to get interested in our solution. The power grid market is moving from analog to digital. It creates a need for our solution for synchronized power grid networks. What we are doing right now is that we are evaluating the market potential and we are also looking into our go-to-market strategy. So that's in a phase and we are working with that right now. If we are looking a little bit ahead, And looking into Q1, we will transition some of the POCs that we have been running for a while with the old synchronization product and move that over to the new SYNPyte. The few of the POCs that we are running will start to use the SYNTA product for tests right now. And we are aiming to start at least two new POCs during Q1. I think most of you have seen the increased communication around the issue with the satellite navigation systems, and they are increasingly facing threats from jamming and spoofing. And we have seen that in the press, in Nordic, in Europe, and even in the U.S., that it's more and more coming up to the agenda that this is an issue to use satellites as a boost navigation system, but also use it, of course, as a synchronization tool. So regions like Northern Europe, Middle Europe, Baltic, definitely, are affected by interference on GPS. And GPS can be affected by natural things like solar storms, snow storms, heavy raining, but also, of course, from yamming or spoofing. And we can see that when we start like two or three years ago to start to talk about GPS synchronization and the issue with GPS, a number of operators, of course, are aware of that. but it was not on the top of the agenda. But it's coming up as an issue that needs more time to get handled. We can see that it is a general downturn on the sales around 5G, but we definitely see that the synchronization part of 5G is growing. and it's driving increased demand for securing more reliable network solutions. Sweden was the first country that was saying that you have to have an alternative for GPS as a synchronization tool, and they were putting it into a mandate into the license that the operator had receive, so they have to have an alternative GPS ready by the first of January 2025. But we see also that other countries is more looking into the Swedish model, and they are, when we had a number of dialogues with regulators and others in other countries to explain how we have done it in Sweden. And we see that other countries are trying to follow Sweden's model, and they are interested to find a way of doing that in different areas. So we see a number of countries are following the way that we have done it in Sweden. And we will next week launch and article theory and some video content. And we have done that through Netnode. And Netnode is the company in Sweden that handles in five different places in Sweden. Actually, you can get time from the network that Netnode have five different places in Sweden. So that is one way of doing that, that together with NetNode, we have together an explanation of how we do it in Sweden, and it will be commercialized globally start next week. And that's the run-around for the Mobile World Congress that will start the week after next. So I hope you all would like to read and see the videos that we are sending out because it will give you a good view of what we are doing and what we are doing with Netnode and the drivers in the market. So that will come up next week. So you all can see that. Okay. Thank you for that. And we move over to the financial numbers. So welcome Joakim.

Thank you, Krister. And to start with, we can As Krister mentioned earlier, Q4 is our strongest quarter ever with net sales of 162.5 million, which is a revenue growth of 30% year on year. It's very confident that despite the challenging market conditions that we see, a little bit different in different regions, but that we, despite that, have this growth trend that continues, that we have the 13th consecutive quarter of growth. And as mentioned previously, that's really a result of the investments we have done in our product portfolio, which have resulted in an extended product portfolio. launched throughout the year addressing the growth areas in the market in this ongoing technology transformation where many customers invest and upgrade their networks. So high growth in the media business in Q4, particularly driven by the previously mentioned strong performance in EMEA region. with a number of large deals where the customer expanding and upgrading their networks. And it was also good to see that we have seen an increased activity and higher revenue in Americas in Q3 and also in Q4 after a soft first half of 2024 in Americas. Operating earnings also coming up to all-time high, almost 30 million in the quarter, even if we are still in an investment period. And the earnings in the quarter is, of course, driven by the strong revenue primarily. But also we can see, which is satisfying, that we have a higher gross margin than last year and that's really driven by the favorable revenue mix with increased support and license revenue from really extended portfolio of software solutions driving that. On the negative side of course we have some inflation driven cost increases that we partly have been able to compensate by price increases and on the cost side we also have increased cost due to the strengthening of the organization within this growth areas, for example. Operating margin of a little bit above 18%, which is close to our long-term target of 20% that we set in the beginning of 2023, the five-year target to reach 20% within the five year period. So that's also, of course, satisfying to see that. Looking at the expenses in the period, the operating expenses, we have an increase of about 17%. And worth to mention is that we have, of course, as previously discussed, strengthening the organization related to, for example, the synchronization initiative and also other growth initiatives. And we have also had a new ERP system implementation going on under 2023, which was successfully launched in Q4. So that has also been some costs for that during the year 23 and during the quarter. Some increases in the quarter is related to the strong sales as, for example, sales commission driven by the strong revenue in the quarter then. And then, of course, on top of that, some inflation driven costs in addition to that. Development expenditures slightly ahead of last year, almost 40 million, and that's of course, this continued investment that we do to make sure that we maintain and increase our competitiveness and secure future growth then. And what's encouraging is that we can already now see the effect of the investment in terms of increased revenue. So we can see that we decrease the development expenditures percentage of total revenue. Lastly, looking at the cash flow, we can see that the net cash flow in the quarter is a little bit more than 4 million. We can see both in the quarter and full year that we continue to improve the cash flow from operations. And what's also encouraging to see in the quarter is when we look at cash flow from changes in working capital. As mentioned previously during the year, we have had an effect of the situation with the shortage of components where we have the last year or one and a half year increased the inventory to secure deliveries. and make sure that we're able to deliver to our customers. And now we can see that that situation has stabilized, which means that we have been able to see the second quarter in a row where we reduced the inventory, even if we have a sharp increase in revenue. So that's satisfying. Worth mentioning is also when we look at working capital that we have A little bit of a negative effect, a decrease in liabilities, and that's related to a prepayment from the time synchronization customer Turk Telekom that have negative impact in unworking capital in Q4 and this year. And of course, opposite impact in last year when the prepayment was received. We have capitalized development, as mentioned previously, affecting investment activities in the quarter and we continue this repurchase of shares program that we initiated earlier 2023 that have an impact of about 15 million in the quarter. And excluding cash impact from share-related transactions, the repurchase of shares, the cash flow in the quarter was positive 17.5 million. And the cash situation at end of 2023 then is 266 million. Yes. Thanks. Okay, moving into questions.

We had a number of questions around the product mix from media during the quarter. I mentioned that our main drivers amongst the product is the 600 series is taking a substantial part of the sales series in a quarter together with the 1000 series. If you look on the edge product, the cloud product, it's an annual recurring revenue, which means that we have quarterly, based on the number of streams they are using, And it's based on how much use of the cloud-based products. And these two models, you can buy like three, how many you will use during the quarter, and then paying the end of the quarter or end of the month, or that you have a fixed amount of streams that you're using permanently long-term, and then you can add that. So the streams is one part, and then we have a license fee for using the product, which is up to close to 20% of the stream cost they're also paying license fee for. Should we go in a little bit deeper on the product mix, Joakim? Do you have any numbers more specifically on the product mix for media?

Yeah, we can say not exact numbers, but as you mentioned earlier, it's really the 1000 CRM main platform and the 600 platform and the licenses related to that that is driving the revenue in the quarter.

We have received a specific question about our Trust Media Trust Boundary product that we have for the media product. It's a combination of a number of features that is within that brand name. First of all, it's a security product. Many of the content is now delivered or distributed over an open network, which means that security is key. But it's also a function that helps you to control your network much, much easier. And what we are trying to do with TrustBandroid, which is a real product that many of our customers are using today, that we gradually start using, is that we are trying to move all the unique functionality that we have in our unique technology, which is easy to use. one of the downside with ip network is this is much more complicated to run ap network but we are trying to move that easiness of use into our product ip video product as well so that's a unique like offering to the market that we are trying to to work on to make sure that it will be as easy to handle an ep network as our existence or a unique technology that we're using so that's something that we're really pushing and take the experience that we have from our previous product into the ipvd market or segmental market as well so that's that's a product that gradually can be implemented into existing customer or new customer So that is a stickiness product that we're trying to use, and it's really appreciating among many of our customers today. We have a question on our revenue on support and services. Can you comment on that Joakim?

Yeah, exactly. We can see that within support and services is the NRE fee that we received from from telecom to support the development of the synchronization product and that part is now fully recognized by october so the impact a little bit of reduction in support and services is related to that the nre fee have been fully recognized for telecom otherwise the underlying support base revenue is still increasing. That's the explanation to that.

We have received a question, a broad question around how we can size a Syntile deal or a Syntile customer and it is a very broad question but mainly it's driven from how large network the operator has. Of course, the order that we received from Denmark is a much smaller order than we received from Telekom, obviously, because Denmark is a much, much smaller country and have a much smaller network. And three is one of the smaller operator and but it is based on number of base station but also how you designed your network and and so that's various a little bit you can have like telecomma decided to have the product at sites but you can more have a centralized network that you have more in the core so it's a little bit various how you would like how you designed your network but definitely the size of the network number of base station you have that's that's that's the key that's the driver and mainly is the tdt network that require a high security and very precise timing in the network, but also 2G, 3G, and 4G use time, but it's not that crucial for those networks. But they need time, so that's also an area that can be in the future product or solution that we can offer with our entire product. But today, we are focused on 5G, because that's the main drivers in the market to have time synchronization for the 5G network. We have also received questions about the market size and volumes for Power Grid. And as I mentioned, we are just in the first phase looking into that and we do like a pre-study just to look into the potential of the market, how our solution is fitting into the power grid. So we are like in the first phase of looking into that. And of course, it's important to have a partner, a customer that we can test our product. And that's the reason why we are running a POC in Europe to get that understanding because we need to design our products to new profile for Power Grid, which is different to 5G. But we know that our product is fitting and can be handled in a Power Grid company. But we need to understand fully how the product needs to be designed. And therefore, it's really important to have like a POC to understand that similar that we have at Turk Telekom when we design the 5G product. Third Telecom was our key partner really to help us to understand the 5G technology and how that impact the synchronization that we had. As you all know, we have had this functionality in our media product in the digital TV network that we have probably around 20, 25 networks globally with the digital TV and many of them are using our synchronization functionality similar to the ones that we have now for 5G. So that's also like a profile that we have developed specifically for the digital TV network.

So let's see.

I think that most of the questions that have been coming in, I think many of them we have already answered in our presentation or in trying to elaborate a bit after right now. Obviously, I mean, we have a question that it's interest for GPS independent synchronization increased. Yeah, I mean, that balance has really been moving up among the telecom operator, but also has been much a broader awareness in the society, but definitely understanding and need for GPS independent synchronization has really moved up. And we should remember that the telecom operator previously, before 5G, had a fairly little knowledge about synchronization because they used GPS. So it was very few people within the organization that had an understanding how to handle sync time synchronization. And the telecom operators are increasing our resources and really increasing the knowledge of how they should handle that. So that's a journey that we have helped many operators to understand and the communication, but we have still like a need for more information, more knowledge, and understand how you should handle that and how that can affect your network. and then you're moving on more to industry services or slicing of the network, it becomes more and more important to have precise time synchronization. We had a question, can you say something about future 6G? No, I cannot say exactly nothing about 6G, but other products would perfectly well into 6G as well. So moving from 5G to 6G is not an issue for us. Maybe it can be an upside because then we will have probably even more advanced services that need even more precise synchronization. We have received some questions around the disambilization and how that will affect our and now we should license this out. So I think that's a topic that we can come back to later and go a little bit deeper into that. That's a common and very normal way of doing it in the telecom industry to do this. And if the technology is not the product that we are standardizing, that's important to understand. So no one can use our product, but this technology or some part of the technology that we will sunlight. Okay, do we have any more questions? I think that we have more or less covered most of the questions that have been coming in. Thank you for today and thank you for listening in. Don't forget to read about the article that we send out next week around our collaboration with Netnode and how we see the market develop. Thanks for today and see you in a quarter.

Thanks.

Thanks.