Net Insight AB (publ)

Good morning, everyone, and welcome to this Q2 presentation from NetInsight. I am Andreas Jordsson, responsible for the coverage of NetInsight here at BNB Carnegie. With me in the studio, I have NetInsight's CEO, Krister Fridsson, and CFO Cecilia Högård-Hörk. Before I hand over to you, I will encourage everyone to send in your questions in the chat function that you find on the same web page as you see me right now. So please send in the questions and I will read them after the presentation. And with that, I hand over to Krister and Cecilia.

Thank you, Andreas. And everyone, welcome to the Q2 report for NetInsight. And the agenda for today is that we will go through the highlights during the quarter and the business overview, and we will start with the media and time synchronization followed by that. And Cecilia will go through the financials, and then we will do a sum-up of the Q2. And as Andreas was saying, that we will have a Q&A after our presentation. If you look into the Q2 result, I'm so happy to see that the revenue is coming back, and we have an increased revenue compared with Q4 and Q1, and that's glad to see. But also if you compare with last year Q2, we have an increase if we compare taking out the one-off software deal that we received in Q2 2024 and have the currency effect also excluded. Then we have a 4% growth quarter to quarter. So that's really great to see. We see still that the market remains very uncertain. And the risk of delay orders. I mean, the orders are in the market, but they can be delayed or move out in the next quarter, so they're not disappearing. So that's the same that we have seen in the last two quarters, that there's a high activity level in the market. So we see a strong demand for our product and service, both in the media part of the business and in the time synchronization. If you look into the Q2 and the different deals that we have made during Q2, we are so happy to announce that we have received one of our largest media deal ever in the company history. And that definitely demonstrates our competitiveness and strong position in the key growth areas that we are investing in and what we have invested in in the last three to four years. It's a high capacity solution that we have delivered And it's IP-based and remote production. So that's specifically those areas that we have invested in in the last years. During the quarter, we secured our first time synchronization deal in the media market. We know that in the media market, when we are moving over to IP, the media market need P2P, time synchronization. So during the Q2, we have developed the media profile for the time synchronization product that we have, and we secured a deal with one of the major global sports events. So that's like a step into the media business that we have a strong position that we see that we can see growth in that area of our time synchronization product that we have. That's definitely a product that can be driven or a solution that can be driven of time as a service and that can supply that service to the media market which will drive volumes for us in the time synchronization product portfolio. We received a field trial order from a new 5G operator in North America during the quarter. We have not seen the growth in time sequence savings invested for during the last six months. However, we continue to experience a strong interest and strong demand from the 5G market. And robust synchronization is becoming a global priority. We see that definitely that the fire operator is looking to have GPS independent solution. We see the government and regulatory bodies that really are focused on time synchronization and looking into how you should handle that without using the GPS or GNSS. To mitigate the effect of the temporarily hesitate market, we initiated a cost saving program during the quarter that we announced in Q1. And the cost reduction that we will do is 30 million on the annual basis. And it will be full effect in Q1, 2026 and gradually increase Q3 and Q4 and fully implemented in the beginning of next year. If we move into the specific market and start with the media, it has definitely been an intense and eventful period for the media segment the first six months this year. We have launched a number of key products and features into the market, and we have started strategic collaboration with other partners. Just a few examples. I mean, we can see that we have a partnership with NetIn technology, that we integrated the AI solution into our cloud product, that definitely will sanction our product and give a number of new features to our customer. We are deep in our partnership with Globetrotters in moving live support from satellite to cloud. You know that we have discussed that this is a growing area to move content from satellite to cloud. One driver is that the frequency band in the U.S. is moved from satellite, which means that you need to take down capacity and solution from satellite and move them more to cloud. So that's definitely an area that we have been focused on, and we are glad to see that we have a close relation with one of the major satellite-operated globecasts. One thing that gets more and more important in our product solution is security of the content. When you move over to unmanaged, but also in managed network, but definitely in unmanaged network, we need to have security of the content that are transported. And we have launched a new feature we call Facility Connect that gives that security for the content moving in an unmanned network. So a number of new features that we have launched to strengthen our position in the market, which will, over time, of course, gain new revenue streams. The major order that we secured in the U.S. reflects the broader market shift that demand for increased capacity at the venues. We have seen that for like two to three years that the increased capacity will move from the core out to the venues. due to the fact it is more content distributed and many new features and functions and increased cameras at the venues. So this is really one of the key trends that we see in the market that will drive our solution and we are focused on the capacity And as you know, we are launching a 400-gig platform in – and this year, beginning of next year, we've strengthened our position. So this order is reflected. Forty venues now are installed with the 100-gig platform 1060s. So that's just a low number of venues that we see in US and a low number of the, this is to an existing customer and they have a lot more venues that can be installed by the 1060 to increase capacity. And this order were secured in a very high competition. which means that we see that our solutions are really strong, and we can go up against competitors and winning deals like this. So this is really glad to see that the 6 million orders are coming in, and we have started to deliver that in Q2, and we will continue in the second half of this year. And if you look into the high-capacity product at 1060, it's actually have double if you see from 10 to 22 to 2026, going from 30% of our revenue to 26% of revenue, showing the trend that you see that high-capacity product will grow over time. And the high significant part of our sales is based on our new product that we have developed, IP-based solution and cloud solution. So that's really taking off, and we see that there's a high demand of those products in the market. And as I mentioned, we will launch the 400-gig platform that will secure our strong position and high capacity offering to the media markets. Moving over to time synchronization, the need of GPS, GNSS independent solution is growing. I know that we have been saying that for a number of quarters, but it's still increasing. And I don't think... no operator in the market realized that they need to handle the time synchronization another way that they have done in the past. So that is really obvious when we talk to operator that the need of GPS independent solutions are increasing. But we also see, of course, that the government is also looking into that. Regulator is also looking into that. We see in the U.S. it started. FCC has started investigating to see how they should solve this. We see that the EU is looking into the vulnerability around the GPS synchronization. UK has started. India has started. So this is a trend that we see going forward that, of course, would drive need for our products. And that's a good trend and definitely is something that we will see in the future, increased demand. And currently we have more than 15 existing customers. We had added two new customers during the quarter. And as you can see, we have the same level of order book as we had in Q2. And this is coming on from the customer that we have, which are in the rollout phase, had not placed any order during Q2. So that's one of the reasons why we have – or that's the reason why we have – a little revenue coming from the time synchronization. The good thing is that we see that in Turkey, the license process has started, and we see that the estimate that they will issue the 5G license in Turkey during Q3. which means that Ferg Telecom will move into rollout phase in the second half of this year, beginning of next year. So that will definitely drive volumes and revenue for us. We see a very positive progress with customer and innovation phase, where the pilot testing is moving forward. And we are adding two new major operators beginning testing our solution this quarter. So we have a good trend and a good progress on the customer that are in the innovation phase. We expect that customers that are in the innovation phase right now hopefully will select our solution during the second half of this year and begin to deploy the deployment of the network towards the end of this year, beginning of next year. We have talked about the standardization quite a lot and it's moving forward and the meeting in June was positive, even though that we see that it will be completed now in mid-2026. So it's moved forward like three to six months, what we had expected in the past. I will just take some time to present or explain the selection procedure to select a new vendor. And this is a specific process for 5G or network-based solutions. And this is more like a standardised process that you have for any vendor that the 5G operator will add into the network. So if you just go through the different steps, I mean, of course, start with the sales discussion that we explain our product. And after that, it's moving into POC, POC, proof of concept. The POC is in the lab. It's not in the active network. It's in the lab. It's a Tesla product. Through specific procedures that we agree with the customer, what type of solution, function, feature would you like to test? We could go through the test and show the customer that our products are meeting the expectation from the customer. The POCs that we have done with the SYNTI for the last one and a half year have been 100% success rate. All the tests that we have done have been successful and meet the expectation from the customer. The next phase that you're doing is the field trial. The field trial can be combined with lab product. You have product in the lab and in the network. This is a combination of lab and a field trial in the open network. And then we had the first pilot installation. That's the first time that you install product into your active network. And it will be in operation into the active network. And as you can see that you have a conversion rate from the PEC to 50%. And that's the number today. We have a number of PUCs that just have ended. We have a number of PUCs that have moved over to field flight that then will move over to first pilot installation. So the conversion rate will go up over time. After the first pilot installation, one of the reasons that you have a pilot installation of a number, it can be tens of units that you install, is that you can see how you should do your network planning. when you will roll out it in your whole network. Then we move on to contract negotiation. And this is like an installation that rollout will go for many years. The customer needs to budget that and the next phase is called rollout. As you can see that we have estimated this to 12 to 24 months. The interesting thing is that it can vary quite a lot. The order that we just received in Q3 for the field file, we did the POC in Q2, and we received a field file order in Q2. So that during the quarter, they moved from POC to field file. So that was really a good and very concise and well-planned activity together with the customer. So it varies quite a lot. We have customers that we have been spending like, 12 to 16, 18 months would take much longer time. So this can vary between the customer. And we need to understand that the time sequence is a critical function in the network, 5G network. And the lifespan is 5 to 10 years or even longer. So the 5G operator needs to carefully select and test the product because this is Very difficult for operators to shift to a new supplier during the rollout or after the rollout phase because it will be very costly. Some countries can have regulatory demand that the 5G operator would like to wait and see what demand the regulator will put on to the operator. And one important part is that the time synchronization for 5G operators is fairly new. In a 3G, 4G network, time synchronization was not an important part. There's very few individuals in the operator to have deep knowledge around the product. It's building up right now, but it takes a little bit more time for the operator to understand. all the needs and the specific product specification within the time synchronization. So this is just showing the phases from sales discussion to rollout phase. And as we have four customer in the rollout phase, and we hopefully hope that we will add another few in the end of this year. Thank you. I will hand over to Cecilia to take the financials.

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

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

Perfect. Thanks a lot, Christopher and Cecilia. As a reminder, you can use this chat function for questions. If you don't see the chat function, just refresh your site and there will be an obvious place where you can send in your questions. I think I'll start then. going from top to bottom, basically, starting with the media side and the large U.S. order that you started to deliver upon in the quarter. Is it possible to give some more flavor on the facing of that order, how much has been booked and how much is left for Q3 and Q4?

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

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

As we saw already and communicated in Q4, we saw a little bit slower marketing in EMEA and APEC, but we saw a continuous strong demand in the US, and we see now that Europe, EMEA, have come back with a strong number, and we have received some good orders in EMEA, more than 10 million orders. That is a good sign that our customers are willing to invest quite into the network that they are running. So both build out of network, but also of course, our customers are winning new deals in the market and place order to us. So we feel like a broad number of customers that are really active. So we don't see that the orders or the activities moving away and disappeared. They are in the market. It's just when the site to place the water. So I think that this is very good and strong demand in Europe. You can see US have been growing the last three quarter. APEC have been stable on like the around 10 million CEC level. But we see the activities in the second half is strong. in all regions and get stronger in APEC as well. So we have a good view and a good feeling for the second half of this year.

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

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

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

We have like a CapEx revenue that is like the 60 million, but based on that we have support, recurring revenue and license based on that. So this will be the 60 million we'll have recurring revenue going forward for the next 5 to 10 years probably. So this is ongoing so that we are building up like a larger base of equipment that we will have license and support based on. And if you look at media, this is all the way from 48% license and support on the media products. It's higher on the sync. So that's just the recurring revenue. And if you look into that, you can see it all the time that the recurring revenue had gone up. A little bit hard to see because it varies between the quarter because we have other than just supported license within the service.

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

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

And I guess the timing of the license in Turkey is a concrete example of a trigger.

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

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

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

No, it's correct. I think that as reaching the target, TimeSync needs to earn more money and revenue so that we can have a break-even and starting to get positive results.

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

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

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

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

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

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

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

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

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

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

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

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

I think we covered most of this. So thanks a lot and good luck for the second half of the year. Thank you.