Teleste Corporation Financial Statement 1.1.-31.12.2019: Net sales and adjusted operating result decreased as expected, order backlog at a good level

TELESTE CORPORATION       FINANCIAL STATEMENTS  13 February 2020  AT 08:30 EET       

TELESTE CORPORATION FINANCIAL STATEMENT 1 JANUARY TO 31 DECEMBER 2019: NET SALES AND ADJUSTED OPERATING RESULT DECREASED AS EXPECTED, ORDER BACKLOG AT A GOOD LEVEL

Fourth quarter of 2019

- Net sales amounted to EUR 58.5 (66.5) million, a decrease of 12.1%
- Adjusted operating result stood at EUR 0.9 (2.2) million, a decrease of 60.6%
- Operating result amounted to EUR 1.2 (2.2) million, a decrease of 44.6%
- Adjusted earnings per share were EUR 0.03 (0.09), a decrease of 63.6%
- Earnings per share were EUR 0.05 (0.09), a decrease of 42.1%
- Cash flow from operations was EUR 7.9 (4.6) million, an increase of 69.2%
- Orders received totalled EUR 64.1 (81.0) million, a decrease of 20.8% 
- Order backlog at period-end totalled EUR 73.2 (71.0) million, an increase of 3.1%

January-December 2019

- Net sales amounted to EUR 235.5 (250.3) million, a decrease of 5.9%
- Adjusted operating result stood at EUR 7.7 (9.7) million, a decrease of 20.7%
- Operating result amounted to EUR 0.8 (9.7) million, a decrease of 92.1%
- Adjusted earnings per share were EUR 0.31 (0.38), a decrease of 19.8%
- Earnings per share were EUR -0.07 (0.38), a decrease of 119.0%
- Orders received totalled EUR 237.6 (264.0) million, a decrease of 10.0%
- Cash flow from operations was EUR 4.1 (15.0) million, a decrease of 73.0%

The Board of Directors proposes a dividend of EUR 0.10 (0.20) per outstanding share.

Outlook for 2020

Teleste does not expect the company's net sales to deviate materially from the level of net sales for 2019 (EUR 235.5 million). Adjusted operating result is expected to amount to EUR 6-10 million.

Comments by CEO Jukka Rinnevaara:

“The net sales and operating result for Q4 decreased year-on-year. Orders received increased from the previous quarter and were at a good level, but decreased from the record-strong reference period. The order backlog stayed at a higher level than a year ago. Net sales were on par year-on-year in Video and Broadband Solutions, but operating result decreased year-on-year. The net sales and operating result of Network Services decreased year-on-year.

In the Video and Broadband Solutions business area, our strategic main objectives are, with regard to access network products, product development in distributed access architecture and the successful launch of sales in the US operator market, as well as significant growth and improved performance in video security and information solutions.

With regard to access network products, the entire industry is in the middle of a technological transformation in which the next-generation distributed access architecture will provide the most competitive solution for increasing network capacity. During the fourth quarter, operators continued to test distributed network solutions. Therefore, operators did not yet commence significant network investments, so the deliveries of access network products decreased year-on-year. Our view is that we retained a strong market position in the European access network market. We also won a significant patent litigation against our competitor in the UK. Our product development progressed in the development of distributed access architecture solutions as planned, and our product range is competitive. Ensuring the interoperability of our products with different parties' central systems proceeded with selected customers during the fourth quarter. During the fourth quarter, orders received and net sales for access network products decreased. At the same time, we invested strongly in new technology and building our market position in North America, which in part burdened the profitability of the business area. According to our estimate, operators' distributed access architecture deployment projects will commence during the second half of 2020.

With regard to video security and information solutions, we proceeded in accordance with our set growth goals. The fourth quarter was strong both with regard to new orders and net sales. During the quarter, we succeeded in securing significant new orders from the German public transport market as well as the biggest European train manufacturers. We won a significant project from a new customer in France, delivering a motorway security solution as announced in October.

In the Network Services business area, the main focus is on sharpening the long-term strategy, focusing on higher-added-value services, and developing the operational activities. In the fourth quarter, orders received and net sales decreased. Net sales decreased in Germany but increased in Switzerland. In Germany, the decrease in net sales was due to a decrease in service deliveries to a key customer year-on-year and the end of a large customer project in late 2018. In England, the growth in fibre-optic network design services continued to be strong. Due to the decrease in net sales, the profitability of the Network Services business area was at a loss during the fourth quarter. In Germany, we have replaced subcontracting by strengthening our in-house resources. Our aim is enhanced cost efficiency. In England, we will focus increasingly on the growing fibre-optic network design services and other high-added-value services.

In 2020, the technological transformation in access networks and its timing will affect demand for our products. The demand for traditional HFC technology is expected to slow down and investment in next generation distributed access architecture to increase. We predict that these investments will be launched in stages during the second half of 2020, first in North America and then in Europe. Estimating the outlook for 2020 is made more difficult by uncertainty over the timing of new distributed access architecture investments by operator and the development of the key customer's service demand in the German services business.

The strategic priorities in 2020 include

• development of the distributed access architecture offering and successful launch of sales in the North American cable operator market
• significant growth of net sales and continued profitability improvement in video security and information solutions
• development of operations and improved profitability in the services business in Germany.

We believe that the measures we have chosen will ensure profitable growth also in the years to come.”

Group Operations October-December 2019

¹⁾ An alternative performance measure defined in the tables section of the report.

Orders received by the Group in the fourth quarter totalled EUR 64.1 (81.0) million, a decrease of 20.8% on the reference period the previous year. Orders received decreased in access network products of Video and Broadband Solutions and following the end of major customer projects in the Network Services business area at the end of last year. Order backlog increased during the quarter by 8.5% and was EUR 73.2 (71.0) million at quarter-end. Order backlog increased in passenger information solutions of Video and Broadband Solutions. Net sales decreased by 12.1% to EUR 58.5 (66.5) million. Net sales decreased particularly in the Network Services business area.

Expenses for material and production services decreased by 17.0% to EUR 30.1 (36.2) million. Personnel expenses decreased by 4.5% to EUR 17.1 (17.9) million. Other operating expenses decreased by 8.7% to EUR 8.3 (9.0) million. Depreciation and amortisation increased by 67.7% to EUR 2.5 (1.5) million. Depreciation recognised in accordance with IFRS 16, which was adopted on 1 January 2019, totalled EUR 1.1 million. The adoption of the new standard increased the operating result by EUR 0.1 million. The adjusted operating result decreased by 60.6% to EUR 0.9 (2.2) million, representing 1.5% (3.4%) of net sales. Operating result decreased by 44.6% to EUR 1.2 (2.2) million, representing 2.1% (3.4%) of net sales. The operating result has been adjusted for the loss of assets due to a crime against a foreign subsidiary and a change in the provision associated with proceedings in the matter. Some of the assets lost as a result of the crime were successfully recovered during the fourth quarter, and diverse measures to recover the lost assets and mitigate the final losses are still underway in different countries. Net financial expenses were EUR 0.3 (0.1) million. Taxes were EUR 0.3 (0.5) million and the Group’s effective tax rate was 26.8% (23.2%). Adjusted earnings per share were EUR 0.03 (0.09) and earnings per share were EUR 0.05 (0.09). Cash flow from operations was EUR 7.9 (4.6) million, an increase of 69.2% due to a decrease in net working capital.

Group Operations January-December 2019

¹⁾ An alternative performance measure defined in the tables section of the report.

Orders received by the Group totalled EUR 237.6 (264.0) million, a decrease of 10.0%. Orders received decreased in access network products of Video and Broadband Solutions. Orders received decreased in the Network Services business area following the end of major customer projects at the end of last year. Orders received increased in passenger information solutions of Video and Broadband Solutions. Order backlog increased by 3.1% to EUR 73.2 (71.0) million. Order backlog increased in passenger information solutions of Video and Broadband Solutions. Net sales decreased by 5.9% to EUR 235.5 (250.3) million. Net sales decreased in the Network Services business area following the end of major customer projects at the end of last year.

Adjusted operating result decreased by 20.7% to EUR 7.7 (9.7) million, representing 3.3% (3.9%) of net sales. Adjusted operating result decreased in access network products of Video and Broadband Solutions and following decreased net sales in the Network Services business area. Adjusted operating result increased in passenger information solutions of Video and Broadband Solutions. Operating result decreased by 92.1%, amounting to EUR 0.8 (9.7) million. The assets lost due to a crime committed against a foreign subsidiary and a provision for expenses associated with the handling of the case, totalling EUR 6.9 million, lower the operating result, but they have been eliminated from the adjusted operating result. The provision is reported as an item that is not allocated to the segments.

Expenses for material and production services decreased by 11.0% to EUR 122.8 (137.9) million. Personnel expenses increased by 0.2% to EUR 66.2 (66.0) million. Depreciation and amortisation increased by 59.7% to EUR 9.6 (6.0) million. Depreciation recognised in accordance with IFRS 16, which was adopted on 1 January 2019, totalled EUR 4.3 million. The adoption of the new standard increased the operating result by EUR 0.3 million. Other operating expenses increased by 19.0% to EUR 38.7 (32.5) million. Other operating result include the above-mentioned adjustment, eliminated from the adjusted operating result. Net financial expenses decreased by 42.5% and were EUR 0.4 (0.7) million. The Group’s taxes were EUR 2.0 (2.2) million. Adjusted earnings per share were EUR 0.31 (0.38) and earnings per share were EUR -0.07 (0.38). Cash flow from operations was EUR 4.1 (15.0) million. Cash flow from operations was reduced by the loss of assets due to a crime against a foreign subsidiary, an increase in inventories and a decrease in advance payments from customers compared with the exceptionally high level.

Video and Broadband Solutions October-December 2019

Orders received decreased year-on-year by 18.3% to EUR 41.8 (51.1) million. Orders received decreased in access network products and increased in video security and information solutions. Order backlog increased during the quarter by 8.5% and was EUR 73.2 (71.0) million at quarter-end.

Net sales decreased by 1.5% to EUR 36.1 (36.7) million. Net sales decreased in access network products but increased in video security and information solutions. Operating result decreased by 34.8% to EUR 1.3 (1.9) million, representing 3.5% (5.3%) of net sales. The operating result decreased due to the net sales of access network products being lower than in the reference period.

R&D expenses amounted to EUR 3.7 (3.4) million, representing 10.2% (9.2%) of the business area's net sales. Product development projects focused on distributed access architecture (including solutions designed for the US market), situational awareness and video security solutions, passenger information systems and customer-specific projects. Capitalised R&D expenses amounted to EUR 1.5 (1.2) million. Depreciation on capitalised R&D expenses was EUR 0.7 (0.6) million.

Video and Broadband Solutions January-December 2019

Orders received decreased year-on-year by 5.8% to EUR 143.5 (152.3) million. Orders received decreased in access network products and increased in video security and information solutions. Net sales increased by 1.9% to EUR 141.4 (138.7) million. Net sales increased in video security and information solutions but declined in access network products. Operating result increased by 4.1%, standing at EUR 8.1 (7.7) million and representing 5.7% (5.6%) of net sales. Operating result was improved by the increased net sales of video security and information solutions.

R&D expenses amounted to EUR 13.5 (12.5) million, representing 9.5% (9.0%) of net sales. Product development projects focused on distributed access architecture (including solutions designed for the US market), situational awareness and video security solutions, passenger information systems and customer-specific projects. Capitalised R&D expenses amounted to EUR 4.7 (4.8) million. Depreciation on capitalised R&D expenses was EUR 2.5 (2.2) million. 

Network Services October-December 2019

Orders received and net sales decreased by 25.1% year-on-year, amounting to EUR 22.3 (29.8) million. Net sales decreased in Germany but increased in Switzerland. The decrease in net sales in Germany was due to the end of a major customer project at the end of 2018 and the demand for services being lower than in the reference period. Operating result decreased by EUR 0.7 million to EUR -0.4 (0.3) million. Operating result represented -1.7% (1.0%) of net sales. The operating result decreased as a result of decreasing net sales in Germany but increased in England, where the focus was on higher-added-value services.

Network Services January-December 2019

Orders received and net sales decreased by 15.7% and amounted to EUR 94.1 (111.7) million. Net sales decreased in Germany due to the end of a major customer project at the end of last year and the demand for services being lower than before. Operating result decreased by 117.5% to EUR -0.3 (2.0) million. The operating result decreased as a result of decreasing net sales in Germany but increased in England, where the focus was on higher-added-value services. 

Personnel and organisation January-December 2019

In the period under review, the average number of people employed by the Group was 1,363 (1,393/2018, 1,492/2017). Of these, 682 (700) were employed by Video and Broadband Solutions and 681 (693) by Network Services. At the end of the review period, the Group employed 1,330 people (1,353/2018, 1,446/2017), of whom 64% (65%/2018, 65%/2017) were stationed abroad. Approximately 2% of the Group's employees were working outside Europe.

Personnel expenses increased by 0.2% year-on-year to EUR 66.2 (66.0/2018, 69.4/2017) million. The change in personnel expenses was attributable to a decrease in the number of personnel, wage increases and capitalisation of R&D costs. The average number of personnel decreased by 2.1%. The number of personnel decreased in both Video and Broadband Solutions and Network Services.

Investments January-December 2019

Investments by the Group totalled EUR 13.0 (7.0) million, representing 5.5% (2.8%) of net sales. Of the investments, EUR 4.7 (4.8) million were related to product development. Other investments included EUR 2.1 million of investments in increasing service production capacity in Germany. New leases reported in accordance with IFRS 16, which was adopted on 1 January 2019, increased investments by EUR 4.3 million.

Product development projects focused on distributed access architecture (including solutions designed for the US market), situational awareness and video security solutions, passenger information systems and customer-specific projects.

Financing and Capital Structure January-December 2019

Cash flow from operations was EUR 4.1 (15.0) million. Cash flow from operations was reduced by lower advance payments from customers compared with the exceptionally high level of the reference year, an increase in inventories and the loss of assets due to a crime against a foreign subsidiary.

Teleste Corporation has credit and loan facilities with a combined total value of EUR 50.0 million. The five-year loan facility of EUR 30.0 million will mature in August 2022. The loan is repaid in annual instalments of EUR 3.0 million. The EUR 20.0 million credit facility will run until the end of August 2020. At the end of the period under review, the amount of unused binding credit facilities was EUR 20.9 (20.0) million. On 31 December 2019, the Group's interest-bearing debt stood at EUR 33.0 (26.8) million.

The Group's equity ratio was 49.5% (51.7%) and net gearing ratio 34.1% (5.9%). A total of EUR 8.1 million was recognised in interest-bearing debt in accordance with the IFRS 16 standard, which was adopted on 1 January 2019. IFRS 16 had the following effect on key figures at the end of the period under review: equity ratio -2.9 percentage points and net gearing ratio +11.2 percentage points.

Key risks faced by the business areas

Founded in 1954, Teleste is a technology and services company consisting of two business areas: Video and Broadband Solutions and Network Services. Europe is the main market and business area, but the company aims to expand its business, particularly in North America. Teleste’s customers include cable operators, public transport operators, train manufacturers and specified organisations in the public sector.

In Video and Broadband Solutions, customer-specific and integrated deliveries of solutions create favourable conditions for growth. On the other hand, the allocation of resources to the deliveries and the technical implementation are demanding tasks, which is why there are also risks involved. Our operator customers' network investments vary according to the development of technology, customers' need to upgrade and their financial structure. End-to-end deliveries of video security and information solution systems may be large in size, setting high demands for the project quotation calculation and management and, consequently, involving risks. Increased competition created by the new service providers may undermine the cable operators' ability to invest. Correct technological choices, product development and their timing are vital to our success. Various technologies are used in our products and solutions, and the intellectual property rights associated with the application of these technologies can be interpreted in different ways by different parties. Such difficulties of interpretation may lead to costly investigations or court proceedings. Customers have very demanding requirements for the performance of products, their durability in challenging conditions and their compatibility with other components of integrated systems. Regardless of careful planning and quality assurance, complex products may fail in the customer's network and lead to expensive repair obligations. The consequences of natural phenomena and global disruptions, such as an epidemic, or accidents, such as a fire, may reduce the availability of components in the order-delivery chain of the electronics industry or suspend our own manufacturing operations. Customs levies imposed by major powers in the world economy and other trade war measures may have a negative effect on component supply chains and, in particular, the profitability of products exported to the United States. Many competitors in the business area come from the United States, which is why the exchange rate of the euro against the US dollar has an effect on our competitiveness. In particular, the development of the exchange rates of the US dollar and the Chinese renminbi against the euro influences our product costs. The company hedges against short-term currency exposure by means of forward exchange contracts. Future treaties between the UK and the European Union  could make deliveries to English customers more difficult. 

Net sales of Network Services come mainly from a small number of large European customers. Therefore, a significant change in the demand for our services by any one of them is reflected in the actual deliveries and profitability. The improvement of customer satisfaction and productivity requires efficient service process management, as well as innovative process, product and logistics solutions to ensure the quality and cost-efficiency of services. The smooth functioning of cable networks requires efficient technical management of the networks and suitable equipment solutions in accordance with contractual obligations. This, in turn, requires continuous development of the skills and knowledge of our personnel and subcontractors. In addition, the sufficiency and usage rates of our personnel and subcontractor network influence the company's delivery capacity and profitability. Subcontractors' costs may increase faster than it is possible for Teleste to increase the prices of its services to its own customers. In larger projects with overall responsibility, tender calculation and project management are complex tasks that involve risks. Severe weather conditions may affect our ability to deliver services.

Teleste's strategy involves risks and uncertainties: new business opportunities may fail to be identified or successfully used. The business areas must take into account market movements, such as consolidations among our customers and competitors. Periods of technological transformation, such as operators migrating to distributed access architecture, may significantly change the competitive positions of the current suppliers and attract new competitors to the market. Intensified competition may decrease the prices of products and solutions faster than we are able to reduce our products' manufacturing and delivery costs.

Various information systems are critical to the development, manufacture and supply of products to our customers. The maintenance of information systems and deployment of new systems involve risks that may affect our ability to deliver products and services. Information systems are also exposed to external threats and we strive to protect ourselves from these threats through technical solutions and by increasing the security competence of our personnel. Teleste Group may also be targeted by illegal activities and fraud attempts that could have a significant effect on the financial result. The Group strives to minimise these risks by continuing to develop good governance practices and increasing the security competence of its personnel. Recruiting and maintaining skilled personnel requires encouragement, development and recruitment efforts, which can fail.

The Board of Directors annually reviews essential business risks and their management. Risk management constitutes an integral part of the strategic and operational activities of the business areas. Risks are reported to the Audit Committee on a regular basis.

On 23 December 2016, a competitor of Teleste filed two complaints against Teleste Limited, demanding damages from the company for the infringement of two patents. Teleste has denied the patent infringements. The disputes were resolved by court decisions issued on 29 January 2019 and 18 November 2019, which were favourable for Teleste and resulted in the annulment of the competitor’s patents. Teleste’s competitor has not appealed the decisions, so they are legally valid. The results of these litigations do not have a material effect on Teleste's financial position. Due to the favourable outcomes, Teleste retains its right to market and sell its products to customers in all of its market areas.

Group structure

The parent company has a branch office in the Netherlands and subsidiaries in 14 countries outside Finland.

Shares and changes in share capital

On 31 December 2019, Tianta Oy was the largest single shareholder with a holding of 23.2%.

In the period under review, the lowest price of the company's share was EUR 5.04 (5.12) and the highest price was EUR 6.80 (7.58). The closing price on 31 December 2019 stood at EUR 5.34 (5.26). According to Euroclear Finland Ltd, the number of shareholders at the end of the period under review was 5,515 (5,531). Foreign and nominee-registered holdings accounted for 6.1% (6.2%) of the shares. The value of Teleste's shares traded on Nasdaq Helsinki from 1 January to 31 December 2019 was EUR 9.2 (13.3) million. In the period under review, 1.6 (2.0) million Teleste shares were traded on the stock exchange. Teleste's share is quoted in the technology section of Nasdaq Helsinki.

On 4 April 2019, Teleste Corporation's Board of Directors decided on a directed share issue without consideration, relating to the payment of the reward for the 2016-2018 performance period of Teleste Group's share-based incentive plan 2015. In the share issue, a total of 22,361 Teleste Corporation shares in the possession of Teleste Corporation were conveyed without consideration to key persons included in the share-based incentive plan, in accordance with the terms of the plan. On 31 December 2019, the Group held 798,821 (821,182) of its own shares, all held by the parent company Teleste Corporation. At the end of the review period, the Group's holding of the total number of shares amounted to 4.2% (4.3%).

On 31 December 2019, the company's registered share capital stood at EUR 6,966,932.80, divided into 18,985,588 shares.

Valid authorisations at the end of the review period:
- The Board of Directors may acquire 1,200,000 own shares of the company otherwise than in proportion to the holdings of the shareholders with unrestricted equity through trading on the regulated market organised by Nasdaq Helsinki at the market price of the time of the purchase.
- The Board of Directors may decide on issuing new shares and/or transferring the company's own shares held by the company, so that the maximum total number of shares issued and/or transferred is 2,000,000.
- The total number of new shares to subscribe for under the special rights granted by the company and own shares held by the company to be transferred may not exceed 1,000,000 shares, which number is included in the above maximum number concerning new shares and the Group's own shares held by the company.
- These authorisations are valid until 3 October 2020.

Decisions by the Annual General Meeting

The Annual General Meeting (AGM) of Teleste Corporation held on 4 April 2019 adopted the financial statements and consolidated financial statements for 2018 and discharged the members of the Board of Directors and the CEO from liability for the financial period 2018. The AGM confirmed the dividend of EUR 0.20 per share for the year 2018 as proposed by the Board. The dividend was paid on 15 April 2019 on shares other than own shares held by the company.

The AGM decided that the Board of Directors shall consist of seven members. Pertti Ervi, Jannica Fagerholm, Timo Luukkainen, Heikki Mäkijärvi and Kai Telanne were re-elected as members of Teleste Corporation's Board of Directors, and Jussi Himanen and Vesa Korpimies were elected as new Board members. Pertti Ervi was elected Chair of the Board in the organising meeting held after the AGM on 4 April 2019. Jannica Fagerholm was elected Chair of the Audit Committee, with Pertti Ervi and Vesa Korpimies elected as members.

The AGM decided to choose one auditor for Teleste Corporation. The audit firm KPMG Oy Ab was chosen as the company’s auditor. The auditor has appointed Petri Kettunen, APA, as the auditor in charge.

The Annual General Meeting decided to authorise the Board of Directors to decide on the purchase of the company's own shares in accordance with the proposal of the Board. According to the authorisation, the Board of Directors may acquire 1,200,000 own shares of the company otherwise than in proportion to the holdings of the shareholders with unrestricted equity through trading on the regulated market organised by Nasdaq Helsinki Ltd at the market price of the time of the purchase. This authorisation is valid for 18 months from the date of the AGM's decision. The authorisation overrides any previous authorisations to purchase the company's own shares.

The Annual General Meeting decided to authorise the Board of Directors to decide on issuing new shares and/or transferring the company's own shares held by the company and/or granting special rights referred to in Chapter 10, Section 1 of the Limited Liability Companies Act, in accordance with the Board's proposal. The new shares may be issued and the company's own shares held by the company may be conveyed either against payment or for free. New shares may be issued and the company's own shares held by the company may be conveyed to the company's shareholders in proportion to their current shareholdings in the company, or by waiving the shareholder's pre-emption right, through a directed share issue if the company has a weighty financial reason to do so. The new shares may also be issued in a free share issue to the company itself.

Under the authorisation, the Board of Directors has the right to decide on issuances of new shares and/or transferring the company's own shares held by the company, so that the maximum total number of shares issued and/or transferred is 2,000,000. The total number of new shares to subscribe for under the special rights granted by the company and own shares held by the company to be transferred may not exceed 1,000,000 shares, which number is included in the above maximum number concerning new shares and the Group's own shares held by the company.

The authorisations are valid for eighteen (18) months from the resolution of the Annual General Meeting. The authorisations override any previous authorisations to decide on issuances of new shares and on granting stock option rights or other special rights entitling to shares. 

Operating environment in 2020

The business objective of Video and Broadband Solutions is to maintain its strong market position in Europe and to strengthen this market position particularly in Northern America.

Demand for broadband services by cable operators continues to grow. The capacity of household broadband services are estimated to grow by 30-40% a year. European cable operators have been able to competitively respond to the increasing demand by investing in DOCSIS 3.1 standard-compliant 1.2 GHz frequency range network upgrades. Investments in expansion of the traditional HFC network infrastructure frequency range continue, but with a lower volume. Operators are already planning investment in next-generation distributed access architecture network solutions. For years now, the cable industry, including Teleste, has been preparing for the next technology wave with which investment in cable network infrastructure can be competitively continued also in the years to come. Teleste will continue to invest in the development of expertise and new technology as well as customer projects. Operators' investments in distributed access architecture have been delayed compared with previous schedule estimates. According to our estimate, operators' distributed access architecture deployment projects will commence during the second half of 2020. Transformation to distributed architecture provides Teleste with growth opportunities, but it also involves risks. Growth is enabled by the increased value of access network optical products as well as the possibility to use the technological transformation to expand business into the North American markets. Achieving interoperability with the cable network central systems is the most significant risk. We estimate that net sales from access network products in 2020 will be on par with the previous year, including the launch of distributed architecture product sales. Net sales are estimated to decrease early in the year and begin to increase late in the year.

Ensuring safety in city environments, increase of public transport services and the increasing popularity of smart digital systems for a smoother life provide a foundation for growing business. Public transport operators and other authorities must ensure smooth operation of services and infrastructure as well as the safety of people. The public transport information systems market as well as video security and situational awareness systems market are expected to continue to grow in 2020. Public transport information systems are developing to be increasingly smart and real-time. Video security solutions are becoming increasingly smart, including pattern recognition and artificial intelligence. Furthermore, a need is arising in the market for comprehensive situational awareness systems that include management of other sensor-level data flows in addition to video image and automate operating processes in exceptional situations. Ensuring competitiveness requires Teleste to continuously make R&D investments in new intelligent solutions. In addition, it is necessary to improve the productivity and cost-efficiency of business. Teleste increased its market share in video security and information solutions during 2019, and 2020 starts with a high order backlog level. Characteristic for the business, a considerable proportion of deliveries will be distributed over several years. We estimate that net sales for video security and information solutions will continue to increase in 2020 from the previous year.

In the Network Services business area, operators' network investments are expected to also increase the demand for services in the long term. The objective is to further develop the operational efficiency of Teleste's services business and increase the share of those services that provide our customers with higher added value. In our largest market area, Germany, we will continue to improve the efficiency of operations, strengthen the capabilities of the organisation and renew the subcontractor network. In addition, we will invest in the continuous improvement of customer satisfaction. The timing of customers' projects in the biggest market, Germany, will have a particularly high impact on the net sales of the Network Services business area for 2020.

Estimating the outlook for 2020 is made more difficult by uncertainty over the timing of new distributed access architecture investments by operators and the level of the key customer's service demand in the German services business. 

Outlook for 2020

Teleste does not expect the company's net sales to deviate materially from the level of net sales for 2019 (EUR 235.5 million). Adjusted operating result is expected to amount to EUR 6-10 million. 

12 February 2020 

Teleste Corporation          Jukka Rinnevaara
Board of Directors            President and CEO

Teleste's Annual Report for 2019, which includes the audited financial statements, will be published no later than week 11 2020. The Company will issue a statement of its corporate governance as a separate report, which will be published together with the Annual Report, and will be simultaneously available on the Company's web site.

This interim report has been compiled in compliance with IAS 34, as it is accepted within EU, using the recognition and valuation principles with those used in the Annual Report. The data stated in this report is audited.

CALCULATION OF KEY FIGURES            

ALTERNATIVE  PERFORMANCE MEASURES 
 
Effective from the beginning of 2019, Teleste has started to report non-IFRS alternative performance measures. The calculation of the alternative performance measures does not take into account income or expense items affecting comparability that are non-recurring or infrequently occurring and not part of the ordinary course of business. The purpose of presenting the alternative performance measures is to improve comparability, and they do not replace the performance measures and key figures presented in accordance with IFRS. The alternative performance measures reported by the Group are adjusted operating result and adjusted earnings per share. Adjusted operating result and adjusted earnings per share exclude material items affecting comparability that are not part of the ordinary course of business. The adjusted items are recognised in the income statement within the corresponding income or expense group.  

New Standard


Teleste has adopted IFRS 16 Leases standard from 1. January 2019. This new standard replaces IAS 17 Leases. As a result of the new IFRS 16 “Leases” standard, the Group recognised non-cancellable leases on the balance sheet. The right-of-use assets increased the balance sheet with 6.9 million euro and the interest bearing liabilities with 6.9 million euro.


A simplified method has been used for the transition, and the comparison figures from the year preceding the transition have not been adjusted. The Group made use of an easement allowed in the standard according to which short-term leases or assets with minor value do not need to be recognised on the balance sheet. The impact of the new standard is an increase of -4,316 thousand euro depreciation of righ-of-use assets and a decrease of +4,650 thousand euro of rents in other operating expenses. Interest expenses increased by -166 thousand euro in finance expenses. Impact on operating profit is +334 thousand euro. The investments for the period do not include the recognition of right-of-use assets of 6.9 million euro.

ADDITIONAL INFORMATION:
CEO Jukka Rinnevaara, phone +358 2 2605 611

DISTRIBUTION:
Nasdaq Helsinki
Main Media
www.teleste.com