The quarterly figures came in above Redeye’s estimates on net sales and, importantly, showed growth y/y, adjusting for one-off income in the comparison period for Operating Systems. Likewise, EBIT was above our estimates due to higher sales and lower OPEX than expected. Gross margins were also solid, considering no high-margin license income in the quarter.

Network accounted for 45% of sales in the quarter due to the recent separation of Enea's Security segment from Network Solutions. Sales grew by 10% y/y. As we did not have separate Security estimates, we combined the Security and Network segments, which showed a 6% beat against our estimates.

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

Support and maintenance declined slightly year over year, while license income and processional services grew over the same period. As previously stated, Network's revenue mix is much less steady than that of Operating Systems' steady flow of royalty fees.

Q1 2024 is the first quarter with the Security segment separated. It comprised about 50% of the previous Network Solutions and had sales of SEK89.2m in the quarter. Thus, it is roughly the same size as the new Network segment, or 45% of total revenues each. Compared to the previous period, the Security segment showed a 9% growth y/y.

Sales from Operating Systems continued to decline. Sales came in at SEK20m, corresponding to a 76% drop year over year. The sharp decline is due to a SEK54m one-off income in the comparison quarter. Also, last year's Q1 included SEK7m revenues from the same customer from the quarter before. As such, excluding this customer, revenues declined from SEK23m to SEK20m. The continuous decline is expected as customers introduce open-source software for new products.

Gross margin landed on 76% (excluding “other operating income”), compared to 74% for full-year 2023 and 80% in Q4 2023 and Q1 2023. We view the gross margin as solid as there was no high-margin license income in the period.

The seasonal pattern of stronger license revenues further into the financial year implies that Q1 will have a much higher share of service revenue (with a lower gross margin) than all other quarters, especially compared to Q4. Considering that Q1 is seasonally weak for the gross margin, 76% should be considered strong. To illustrate the seasonality, see the diagram below for the same figures:

Reported OPEX, incl. D&A, was SEK178m, and “clean” OPEX (excl. D&A) was SEK136m. “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. OPEX, excl. D&A declined sequentially by SEK13m (8.5%), or SEK14m (9%) compared to last year. According to Enea, its cost base going into 2024 has been reduced by SEK60m, as previously communicated in its cost-savings measures. The underlying total cost base was SEK118m.

Enea reiterated its financial targets of double-digit sales growth in its focus areas and an EBITDA margin above 35%. The outlook of "above 30% EBITDA margin" for FY 2024 was also reiterated. The EBITDA margin was 29% in Q1 2024. While this is below Enea's target of 35%, it should be considered strong in the seasonally weak Q1. The Security and Network segments showed sales growth of 9, and 10%, respectively. Thus, it is already approaching Enea's target of double-digit sales growth.

Net debt decreased by SEK76m sequentially due to the strong cash flow (change in cash) of SEK51m, mainly driven by working capital movements of SEK61m. Net debt/EBITDA stands at 0.7x versus 1.6x in Q4 2023.

Enea is authorized to repurchase shares worth SEK10m until its annual general meeting, scheduled for 6 May 2024. Based on the share price of SEK51, the buyback authorization translates to about 1% of Enea's outstanding shares.

After a period of internal focus with cost savings and internal culture, we think Enea now appears to consider growing through M&A once again. While the company states that it aims to be debt free, this will likely be reached in just more than a year. As such, the CEO stated that M&A is becoming interesting again - because the current size is considered "subscale". Mr. Lidbeck commented that revenues of USD250m, i.e. +c150% from today, would be more optimal.

Note that the Security and Network segments' CAGR for 2023 is based on Redeye’s estimates.