Total revenue was SEK 248m, +18% Y/Y (+13% FX adjusted), mainly driven by a one-off license fee in Operating Systems of SEK54m. This was slightly above our estimates of SEK240m. Higher revenues from Operating Systems explain the deviation. EBIT was SEK47m, corresponding to an EBIT margin of 19% (-4% last year). This was 10% above our estimates of SEK43m. Important to note is that without the one-off license fee in Operating Systems (which is otherwise almost purely recurring), EBIT would be negative.

Sales from Network Solutions declined by 8% y/y, or by 13% currency adjusted. The y/y drop can be explained, as we indicated in our preview, by not including any new license contracts in the quarter. While Enea does not provide a detailed development between cyber security and telecom, it is clear from Enea that telecom is struggling while cyber security is developing well.

Due to the seasonal pattern in Network Solutions, with Q2 typically being bigger than Q1, Q3 bigger than Q2, and Q4 bigger than Q3, we provide a quarterly comparison diagram below.

The y/y decline in Network Solutions was caused by y/y declines of both Licenses and Professional Services. License revenues declined from SEK80m to cSEK58m, while Professional Services declined from cSEK43m to cSEK36m. As previously stated, the revenue mix of Network Solutions is much less steady than that of the steady flow of royalty fees in Operating Systems.

The revenue mix of Network Solutions can be seen below:

Sales from Operating Systems was boosted by a one-off license fee of EUR4.8m (cSEK54) in the quarter. This was from one of the two key accounts (Nokia and Ericsson) that renegotiated its contract - from a recurring license fee to a one-off license fee followed by minor maintenance fees. We commented on this news here. Sales came in at SEK84m, or cSEK30m excluding the one-off. This was SEK7m better than we had estimated. We think the underlying beat originated from one or a few smaller customers completing system upgrades in the quarter. Hence, we believe the underlying base of recurring revenues is rather around SEK23m.

Gross margin landed at 80% (excluding “other operating income”), compared to 75% for full-year 2022 and 71% in Q1 last year. The one-off license fee from Operating Systems contributed positively, while the lower license revenues in Network Solutions contributed negatively.

The seasonal pattern of license revenues being stronger the farther into the financial year implies that Q1 will have a much higher share of service revenue (with lower gross margin) than all other quarters, but especially compared to Q4. To illustrate the seasonality, see the below diagram for the same figures:

Reported OPEX, incl. D&A, was SEK150m, and “clean” OPEX (excl. D&A) was SEK109m. “Other operating income” consists of revaluation of the incentive program and FX-related revaluations of accounts receivable, meaning that we consider this a one-off. This means that the underlying OPEX is SEK109m. This level has been relatively stable over the last four quarters.

Enea states that it sees significant uncertainty in the global environment and challenges in the telecom market that will affect Enea’s business. Enea aims for revenues and EBITDA in line with last year, implying revenues of SEK959m and EBITDA of SEK292. This aligns with our estimates on topline but with higher profitability.

With SEK521m in interest-bearing debt and SEK258m in cash, net debt is at SEK263m. Compared with LTM EBITDA of SEK348m, we get net debt/EBITDA at 0.8.

Assuming a conservative ceiling of Net Debt/EBITDA of 2.0, we think Enea can make acquisitions worth SEK 350m. Considering the LTM EBITDA, there is even more room, but we think the current level is temporarily boosted by the one-off license fee in Operating Systems this quarter.

Considering the current negative market sentiment, with valuations coming down also on the private market, we deem it possible to acquire a company at a multiple of 2.5x sales, which would add around SEK140m to Enea’s revenue base, or around 15% to total sales.

However, considering that Enea will complete a strategic review in Q2 (see below), we think the company’s focus is elsewhere.

In the report, Enea stated that it would conduct a strategic review of its telecom business of Network Solutions in Q2. Enea explains that the telecom market is challenging, with operators running with heightened OPEX (e.g., high energy costs) and financial costs. This causes telcos to push investments into the future and instead "sweat use" the last bit of their existing technology. This has implied that moving to the new architecture for 5G (5G stand-alone) has taken longer than anticipated. This, in turn, has resulted in too few customers investing in Enea’s 5G portfolio.

Low sales and high R&D costs for Enea’s 5G portfolio have caused the company to initiate a strategic review. Enea states that it will focus on the growing parts and that profitability is key. Our interpretation of this is that one or a few of Enea’s 5G products are intended to be sold in the reasonably near future.