Video transport and streaming technology provider Net Insight reported its fourth quarter and full year 2017 financial results. Revenue was SEK 426.7 million (49.9 million USD1), a decrease of 15.2% versus 2016.
During the Company’s earnings call, CEO Fredrik Tumegård described 2017 as a “demanding year.” The revenue decline was attributed to three principal factors: (1) the continued transformation of the global media market, (2) a lack of major sporting events in 2017, (3) and the Company’s internal efforts focused on improving efficiency and productivity.
In reviewing the market transformation and its impact on technology suppliers, management cited the most recent edition of the IABM DC Global Market Valuation Report (GMVR). The GMVR is jointly published by Devoncroft and the IABM and is widely referenced on issues relating to market forecasting.
Net Insight’s management elaborated further on the market transition, drawing a distinction between the transition having less to do with technology and much more to do with the development of new business models. Stated Tumegård, “…in 2017 it became clear that the market needs more time to adapt content and business models to changing consumer behavior.”
The year’s challenging performance was anticipated by Net Insight in its financial releases earlier in 2017. In its third quarter report, Net Insight stated “given the current sluggish market, the assessment is that it is still possible, but more challenging than previously anticipated, to achieve the prospects communicated in the second quarter of 2017.”
Net Insight remains optimistic. “We feel confident with our strategy as we have very competitive products and an attractive customer portfolio” said Tumegård.
As for non-financial accomplishments Net Insight noted its marketing efforts have led to increased brand awareness. This is an observation confirmed by the results of the most recent Big Broadcast Survey, which offers an annual global “Voice of the Customer” on over 100 brands active in the media technology sector.
Net income for the year was SEK 3.7 million or (0.01 earnings per share), a substantial decrease compared to the SEK 35.2 million (0.09 earnings per share) reported for 2016.
Gross margins for 2017 were 58.1%, a decrease from 62.7% versus the prior year.
Since Net Insight conforms to IFRS accounting standards, the Company capitalizes a portion of its research development expenses meeting certain criteria. Capitalized development for the year was SEK 87.3 million ($10.2 million USD). The subsequent amortization of capitalized development impacts gross margin negatively.
Adjusted gross margin, eliminating development amortization, was 72.3% in 2017, compared to 74% in 2016.
Operating income for 2017 was SEK -9.48 million, which contrasts against 2016 operating income of SEK 49.4 million.
Net Insight had operating expenses of SEK 257.5 million for the year, a decrease of 3.4% compared to 2016.
- Sales and marketing expense was SEK 144.7 million, an increase of 5% versus 2016. Expressed as a percentage of revenue, sales and market expense was 33.9% in 2017, which compares to 27.2% during 2016. The increase in sales and marketing as a percentage of revenue is a reflection of the decrease in sales volume.
- Administrative expenses decreased by 8.4% from 54.2 million SEK in 2016 to SEK 49.7 million during 2017. Administrative expenses represented 11.6% of revenue for the year, compared to 10.8% in 2016.
- Total Development expense (including the capitalized portion) for the quarter was SEK 150.4 million, a slight rise versus the SEK 149.1 million in 2016.
The practice of capitalizing development expenses makes operating cash flow a less meaningful measure of a technology business (in the author’s opinion). Instead, a review of free cash flow (operating cash flow less capital expenditures) is more appropriate.
Free cash flow for the year was SEK -21.7 million, which compares to SEK 30.1 million during 2016.
Revenue by Geography
Net Insight experienced year-over-year sales declines across all regions.
- For 2017, Net Insight generated sales from Western Europe of SEK 194.6 million, a decrease of 15.6% versus the previous year. Western Europe was the largest contributor to total revenue, accounting for 45.7% of sales during the year. In 2016, Western Europe represented 45.8% of overall sales.
- The Americas contributed SEK 133.4 million or 31.1% of Net Insight’s revenue for the year (versus 32.3% in 2016). Compared to 2016, revenues from the Americas decreased by 18.4%. Management indicated consolidation of customers in the US contributed to weakness in the Americas market.
- Rest of World sales were SEK 98.7 million, a decrease of 9.2% versus the year earlier period. As a percentage of total sales, Rest of World contributed 23.2% in 2017 versus 21.6% during 2016.
Revenue by Type
- Sales attributed to Net Insight’s hardware products were SEK 160.6 million in 2017, a decrease of 28.3%. As a percentage of total sales, hardware products were 37.6% of the year’s sales versus 44.5% during 2016.
- Software licenses accounted for SEK 107.5 million of revenue for the year, a decrease of 12.5% over the year earlier period. Software contributed 25.2% of overall revenue during the year versus 24.4% in 2016.
- Support and services sales were SEK 159.1 million during the year, an increase of 3.2% versus the year earlier. Support and services were 37.3% of overall revenue for year, a significant increase from the 30.6% contribution during 2016.
Revenue by Vertical
- Sales in the Broadcast & Media (BMN) business vertical were SEK 375.4 million, a 15.3% decrease over the prior year. BMN was responsible for 88% of Net Insight’s revenue in the year, an identical percentage as in 2016.
- Sales in the Digital Terrestrial TV (DTT) vertical were SEK 46.9 million, a decrease of 22.3% against 2016. On a percentage basis, DTT represented 11% of overall revenue in 2017, compared to 12% in 2016.
- The CATV/IPTV vertical was approximately 0% of total sales in 2017. It was 1% of total sales during 2016.
Net Insight ended the year with 249 employees, substantially the same as the prior year’s total of 248.
Cash and cash equivalents was SEK 344.1 million on December 31, 2017, down from the SEK 335.7 million balance as of December 31, 2016.
Management Commentary on Live OTT Solution Offering
The Company’s management team spent a large portion of its earnings announcement reiterating the market opportunity for its live OTT offering Sye. Management had communicated an ambition to secure a reference customer during 2017. Net Insight was not able to reach this goal. The team attributed the difficultly in securing a customer deployment to delayed customer decisions owing to a need to revise business models.
Also on the earnings call Net Insight drew attention to the first upcoming deployment of Sye at Swedish auction house Kaplans. This first commercial launch is anticipated at the end of the first quarter of 2018. Adding to this initial commercial momentum are planned integrations with MediaTech in Hong Kong, Tata’s Video Delivery Network (VDN) offering, and Ericsson’s Unified Delivery Network (UDN).
1 2017 Average SEK / USD exchange rate using IMF data
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