Open Insight #6
Welcome to Open Insight, the blog for investors and stakeholders with an interest in our journey. This is where you can find out more about our offering and market position, our progress, challenges and growth. In this issue, I will be telling you more about our financial targets and highlights in the first quarter. I also want to give you an update about our continued focus on IP-based media solutions, where we have won important new business.
The pandemic continues to affect us, although I hope that the impact will gradually decrease towards the end of the year. At a pace with the vaccine roll-out, I am hopeful that the market will continue to recover. I am delighted that the two major sporting events, the Olympics and the EURO 2020 soccer championships, that were postponed last year are likely to go ahead this summer.
At the same time, the pandemic has accelerated trends and expansion in the areas of cloud-based services and remote production, with production now even taking place literally at-home. One of our customers and a global leader in the distribution of video content online, Tata Communications, now broadcasts 1,500 events remotely. Tata sees considerable potential in remote production and assesses that the figure is set to double over the coming 18 months.
I am determined to deliver on our planned roll-out of new products and solutions. If we succeed in our growth areas, the potential for exceeding our financial targets is considerable.
Growth journey and new strategy
Last year, we focused on setting our new strategy, a change journey that we have broken down into three phases.
The first phase is about establishing our internal base. Here, we have already made considerable progress with a new management team, organizational structure and growth strategy, as well as a sharper focus on sales and marketing.
In phase two, we are focusing on core operations, for example through the divestment of ScheduALL. We are also focusing sharply on increasing growth on existing markets. Here, we launched a new license-based business model with recurrent revenue streams based on our cloud-based Nimbra Edge solutions and our other products containing a large amount of software. We are a market leader in this field and are amongst the first in our sector to implement this approach. We launched our new business model at the end of April and the market reception has already been positive.
To begin with, we are approaching new customers but we will eventually also approach our existing customers. The new business model gives our customers the opportunity to purchase continuous updates rather than buy new equipment. This lowers the threshold for new customers who can now invest in new technology and advanced equipment with less risk and at a lower cost. This generates steadily growing licensing revenue over time, improves profitability and ensures more stable revenue streams.
In the third phase, we are expanding into new market segments and increasing our offering to existing customers further. We have already outlined the evaluation of the market for time synchronization we have carried out in an innovation study in collaboration with the Royal Institute of Technology (KTH) and Vinnova. We are now developing the solution further and have started talks with customers and partners and launched customer tests. Our new cost-efficient solutions for cloud-based and online media solutions create new opportunities and increase our addressable market. The product is a close fit with enterprise customers that want to upgrade to more professional video services and increase the production quality of their online marketing and external communication.
Quarterly profit and financial targets
We have just published our quarterly report, and reported growth for the second consecutive quarter even if the market remains cautious. In the first quarter 2021, we achieved continued growth and revenue increase of 2.6%, despite a negative exchange rate effect. Adjusted for currency effects, growth was 11.6% year-on-year.
We have now set two external financial targets of an average annual organic growth of at least 10% in the period 2021–2025. The target for operating margin is an annual EBIT of at least 10% for the same period.
For both targets, I want to underline that they relate to minimum 10% growth and EBIT on average over the period. In Q1, for example, EBIT was 4%, which means that we need to achieve more than 10% to reach the target we are working towards.
As we are now seeing increased customer and market activity, from 1 April we decided to terminate our short-term staff furloughs in Sweden, which means that all our employees are now working full time. This is an important signal while it also increases our ability to further fuel growth and development.
Continued focus on efficient transition to IP
We are focusing sharply on the launch of IP-based products as part of the market’s transition towards cloud-based workflows. Our investment supports the new SMPTE 2110 standard for IP video, where we won two important contracts in the quarter.
Our existing products work well in parallel with the new offering, and we are helping our customers to seamlessly transition to an IP-based environment. This means that companies can avoid major intermittent investments. Instead, capacity can be easily and flexibly added as the need increases, for example through our Nimbra and Aperi products, which can be integrated in a range of different solutions.
SDI has run its course
For decades, SDI has enabled the transition from analog to digital video infrastructure. Since the start of the millennium, we have transported SDI over IP networks, and distribution of TV content has increasingly shifted towards broadcasting in IP format via IPTV and OTT networks (play services), although studios have continued to use SDI for production. This has changed over the last two years, and the pandemic has highlighted the benefits of using IP throughout the entire flow from camera to viewer.
SDI no longer meets sector expectations on global automation and does not provide the flexibility required in a more distributed production environment with a high degree of remote production and production staff that can be located anywhere in the world. The 4K and 8K formats increase the demands on bandwidth and new infrastructure, which means that media companies are simultaneously upgrading to IP-based production solutions.
An increasing number of TV and production companies are choosing to transition to IP studios in order to offer the type of experiences that today’s consumers expect.
Major advantages with IP
One of the advantages with IP is that it enables better and more flexible working methods, which increases the efficiency of production and reduces costs. Moving to a standardized IT-based infrastructure also enables increased cloud functionality. Another advantage is that tasks can be more easily automated, thus creating smarter and more distributed workflows.
Secure and cost-efficient migration to IP
In recent years, Net Insight has increased its R&D investments in cloud-based and IP workflows. The investment in Aperi, the development of Nimbra Edge and the new IP-based media processing platform Nimbra 1060 provide some clear examples of this. We have an extensive installed base of Nimbra MSR products that connect events, studios and broadcasting locations across IP networks. These products have been virtualized, and the new IP studio standards are added in the form of software upgrades, which enable existing customers to start the migration to an IP-based or shared production environment efficiently and securely. We are also embedding connectivity in our new cloud-based platform Nimbra Edge, with the aim of utilizing and moving elements of production and distribution to cloud architecture, which creates a uniform platform.
Security is a key component when connecting internal studio networks to open IP networks and communicating large-scale media flows between different IP networks. Alongside some of our major media customers, we have developed new key functionality that we term IP Trust Boundary. This secures communication of media streams between open and private IP networks, and enables scalable and efficient IP production with multiple 100 Gbps feeds. It also simplifies administration of various IP domains with customers, and between different customers.
Thank you for your time. It is clear to me that our increased focus has paid off, and I am delighted that we won two important deals with UK companies Red Bee Media and NEP Connect in the first quarter. They have chosen to implement our Nimbra platform to enable new scalable IP-based production flows.
In the next newsletter, I will be talking more about our growth initiatives and development in time synchronization and Nimbra Edge.