TELESTE CORPORATION INTERIM REPORT 1 JANUARY TO 31 MARCH 2015: SIGNIFICANT INCREASE IN NET SALES, PROFIT AND ORDERS RECEIVED

TELESTE CORPORATION  INTERIM REPORT  30.04.15 AT 08:30

TELESTE CORPORATION INTERIM REPORT 1 JANUARY TO 31 MARCH 2015 

SIGNIFICANT INCREASE IN NET SALES, PROFIT AND ORDERS RECEIVED

First quarter of 2015
- Net sales amounted to EUR 53.4 (43.5) million, an increase of 22.8%
- Operating profit amounted to EUR 2.6 (1.3) million, an increase of 101.3%
- Undiluted result per share stood at EUR 0.12 (0.05) per share, an increase of 136.5%
- Orders received totalled EUR 56.9 (46.9) million, an increase of 21.2%
- Operating cash flow was EUR -1.2 (1.5) million  

Outlook for 2015

We estimate that net sales and operating profit for 2015 will exceed the 2014 level. 

Comments on the first quarter of 2015 by CEO Jukka Rinnevaara: 

"Demand for Teleste's products and services in the first quarter of 2015 in our key markets has been good. Orders received in the quarter reached Teleste's all-time high of EUR 56.9 million. The orders received were at a record level even without the Mitron acquisition. Also net sales and operating profit clearly exceeded the comparative period. In particular, orders received and net sales were increased by products in line with the new Docsis 3.1 standard. The improvement in our operating profit was achieved through organic growth.

Orders received by Video and Broadband Solutions grew strongly. The greatest growth in demand was registered in optical network products. Along with the acquisition of Mitron, our net sales was boosted by the sales of access network products and video security solutions. Orders received by the business area increased the most in France, Belgium and Israel. The most significant growth in deliveries was recorded in France, the UK and Belgium. Our good delivery capability was instrumental in helping us meet the increased demand, and thus improving the business area's profitability significantly. Early in this year we carried out the acquisition of Mitron Group Oy Ltd's entire share capital, which was transferred to the ownership of Teleste. Mitron is a Finnish provider of public transportation information systems and modern display solutions. Mitron is ideal for Teleste's strategy and strengthens our presence as a comprehensive supplier of rail video security and information solutions. 

As for Network Services, we were able to improve our operating profit over the comparative period, although the result was burdened by investments in the expansion of business in the UK. In Germany, we reached good qualitative results measured by our customer's standards while achieving the planned profitability. The volume of our services business has developed positively in Switzerland, where we increased our net sales significantly from the last year.” 

Group Operations in January to March 2015 

In the first quarter, orders received by the Group totalled EUR 56.9 (46.9) million, which is 21.2% above the reference period. The Group's order backlog amounted to EUR 42.3 (16.5)million. 

Net sales were EUR 53.4 (43.5) million, up 22.8% from the comparative period. Compared to the same period in the previous year, operating profit increased by 101% standing at EUR 2.6 (1.3) million, which is 4.9% (3.0%) of the net sales. Personnel expenses amounted to EUR 17.0 (14.0) million. Together with the Mitron acquisition our personnel expenses were increased by recruitment of additional employees in Network Services. Undiluted result per share stood at EUR 0.12 (0.05) per share, an increase of 137%.

Operating cash flow stood at EUR -1.2 (1.5) million. Operating cash flow was decreased by growth in net working capital, which resulted from increased inventories and reduced accounts payable, including changes in the working capital of Mitron. 

Operations received through the Mitron acquisition are reported under the figures for Video and Broadband Solutions. The Mitron impact on the reported figures for the first quarter were as follows: orders received +2.1, net sales +5.6, operating profit including group level intangible asset depreciations +0.0 millions of euros. The order backlog transferred in the acquisition stood at EUR 23.7 million.

Video and Broadband Solutions in January to March 2015

Year-on-year orders received improved by 36.5% standing at EUR 34.0 (24.9) million. Order backlog strengthened to EUR 42.3 (16.5) million. Net sales grew by 42.1% amounting to EUR 30.5 (21.5) million. Along with the acquisition of Mitron, our net sales were increased by the sales of access network products,  passive and house network products as well as video security solutions. Operating profit increased by 150% to EUR 2.0 (0.8) million, representing 6.6% (3.7%) of net sales. The year-on-year operating profit percentage was improved by increased sales volumes. 

R&D expenses amounted to EUR 2.9 (2.6) million, i.e. 9.4% (12.1%) of the business area's net sales. Capitalized R&D expenses amounted to EUR 0.4 (0.3) million. Product development projects focused on network products complying with the Docsis 3.1 standard and on customer-specific projects. Depreciation on capitalized R&D expenses equalled EUR 0.3 (0.3) million.

Network Services in January to March 2015

The first-quarter orders received and net sales amounted to EUR 22.9 (22.0) million, which was 3.9% higher than in the comparison period. Net sales increased particularly in Switzerland. Operating profit stood at EUR 0.6 (0.5) million, up 21.4% from the comparative period. Operating profit was 2.6% (2.2%) of net sales. The year-on-year operating profit was improved by the reduced loss in the UK, where investments in the expansion of the services business continued. A good operational result was achieved in Germany.

Personnel and Organization in January to March 2015 

In the period under review, the Group had an annual average of 1,466 people (1,262/2014 1,335/2013), of whom 665 (554) were employed by Video and Broadband Solutions, and 801 (708) by Network Services. At the end of the review period, the number of people working for the Group was 1,462 (1,260/2014, 1,342/2013), of whom 68% (71%/2014, 73%/2013) were working outside Finland. Approximately 3% of the Group's employees were working outside Europe.

Wages, salaries and social expenses increased over the previous year and amounted to EUR 17.0 (14.0/2014, 14.4/2013) million. This increase in personnel expenses was due to the acquisition of Mitron and growth in the number of personnel working for Network Services.

Investments and Product Development in January to March 2015

Investments by the Group in the period under review totalled EUR 12.4 (0.9) million accounting for 23.3% (2.1%) of net sales. EUR 11.5 million of these investments involved the acquisition of Mitron. Investments in product development equalled EUR 0.3 (0.3) million. Investments of EUR 0.1 (0.1) million were made under financial lease arrangements.

Product development projects focused on network products complying with the Docsis 3.1 standard, network management system, distributed access architecture and customer-specific projects.

Financing and Capital Structure in January to March 2015

Operating cash flow stood at EUR -1.2 (1.5) million. Operating cash flow was decreased by growth in net working capital, which resulted from increased inventories and reduced accounts payable, including changes in the working capital of Mitron.

In January, Teleste Corporation signed new overdraft and revolving credit facilities with a total value of EUR 45.0 million. These agreements replaced the previous ones. The new binding agreements are valid until the end of March 2018. At the end of the period under review, the amount of unused binding credit facilities amounted to EUR 17.0 (17.0) million.

The Group's equity ratio equalled 49.0% (53.7%) and net gearing 21.9% (12.3%). On 31 March 2015, the Group's interest-bearing debt stood at EUR 30.5 (24.2) million.

Key Risks 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. With Europe as the main market area, our clients include European cable operators and specified organisations in the public sector.

As to Video and Broadband Solutions, client-specific and integrated deliveries of solutions create favourable conditions for growth, even if the involved resource allocation and technical implementation pose a challenge involving, therefore, also reasonable risks. Our customers’ network investments vary based on the relevant need for upgrading and their financial structure. Significant part of Teleste’s competition comes from the USA so the exchange rate of euro up against the US dollar affects our competitiveness. The exchange rate development of the US dollar and the Chinese renminbi to the euro affects our product costs.

The company hedges against short-term currency exposure by means of forward exchange contracts. The situation in the European financial markets may slow down our customers’ investment plans. Furthermore, a weakening in the consumer purchasing power in Europe could slow down the network investments by the cable operators. Competition increased by the new service providers (OTT) may undermine the cable operators' ability to invest. Availability of components is subject to natural phenomena, such as floods and earthquakes. Correct technological choices and their timing are vital for our success. Regardless of careful planning and quality assurance, complex products may fail in the customer's network and lead to expensive repair obligations. 

Net sales of Network Services comes, for the most part, from a small number of large European customers, so a significant change in the demand for our services by any one of them is reflected in the actual deliveries and profitability. To ensure quality of services and cost-efficiency along with efficient service process management, customer satisfaction and improvements in productivity require innovative solutions in terms of processes, products and logistics. Smooth operation of cable networks requires effective technical management and functional hardware solutions in accordance with contractual obligations. This, in turn, demands continuous and determined development of skills and competencies in Teleste’s own personnel as well as those of our subcontractors. In addition, Teleste’s ability to deliver and compete may be constrained by the adequacy of our own personnel and our sub-contractor network capacity. Tender calculation and management of larger projects with overall responsibility are complex and include risks. Severe weather conditions may affect the supply conditions of our products and services.

Teleste’s strategy involves risks and uncertainties – new business opportunities may fail to be identified or they cannot be acted upon successfully. It is important for our business areas to take into account any market developments such as consolidations taking place among the clientele and competition. Intensifying competition may decrease the prices of products and solutions faster than we manage to reduce our products’ manufacturing and delivery costs. Various information systems are critical to the development, manufacturing and supply of products to our customers. Maintenance of information systems and deployment of new systems involve risks that may affect our ability to deliver products and services. Information systems may also be subject to external threats, from which we aim to protect ourselves. Acquisition of skilled personnel and maintenance of their competence require encouragement, development and recruitment, which can fail.

The Board of Directors annually reviews any essential risks related to the company operation and their management. Risk management is an integral part of the strategic and operational activities of the business areas. Risks are reported to the Board on a regular basis.

The company has covered any major risks of loss involving the business areas through insurance policies. Insurance will also cover credit loss risks related to sales receivables. In the period under review, no such legal proceedings or judicial procedures were pending that would have had any essential significance for the Group operation.

Group Structure

Parent company Teleste has branch offices in Australia, the Netherlands, and Denmark with subsidiaries in 14 countries outside Finland. Teleste Management II Oy, founded in December 2011, has been consolidated in the Teleste Group figures on account of financial arrangements.

Shares and Changes in Share Capital

On 31 March 2015, EM Group Oy was the largest single shareholder with a holding of 23.2%.

In the period under review, the lowest company share price was EUR 5.32 (4.25) and the highest was EUR 7.38 (4.86). Closing price on 31 March 2015 stood at EUR 6.94 (4.53). According to Euroclear Finland Ltd the number of shareholders at the end of the period under review was 5,151 (5,073) while foreign ownership accounted for 5.0% (4.8%). The share exchange in the period 1 January to 31 March 2015 was 1.1 (0.8) million. The value of this exchange amounted to EUR 7.5 (3.6) million.

In January, the Company transferred 56,924 shares as part of the purchase price in the context of the acquisition of the entire share capital of Mitron Group Oy Ltd by Teleste Corporation. In February, the Company transferred 73,644 shares in a directed free share issue constituting part of Teleste Corporation's 2012 long-term incentive plan.

At the end of March 2015, the Group held 1,059,086 of its own shares, of which the parent company Teleste Corporation had 517,086 shares and the controlled companies had 542,000 shares, respectively. At the end of the period, the Group's holding of the total amount of shares amounted to 5.6% (6.3%).

On 31 March 2015, the registered share capital of Teleste stood at EUR 6,966,932.80 divided in 18,985,588 shares.

Valid authorizations at the end of the review period:
- Purchases of own shares: maximum 1,200,000 of the Company's own shares, valid until 30 September 2015.
- Issue of new shares: maximum 4,000,000 shares, valid until 31 March 2017.
- Disposal of own shares in possession: maximum 1,800,000 shares, valid until 31 March 2017. 
- Based on the special rights granted by the Company, the number of shares to subscribe may not exceed 2,500,000 shares; these special rights are included in the maximum warrants concerning new shares and the Group's own shares mentioned above. This authorization is valid until 31 March 2017.

Events after the end of the review period

The Annual General Meeting (AGM) of Teleste Corporation held on 9 April 2015 confirmed the financial statements for 2014 and discharged the Board of Directors and the CEO from liability for the financial period. The AGM confirmed the dividend of EUR 0.20 per share proposed by the Board. The dividend was paid out on 20 April 2015.

The AGM decided that the Board of Directors consists of six members. Mr. Pertti Ervi, Ms. Jannica Fagerholm, Mr. Esa Harju, Ms. Marjo Miettinen, Mr. Kai Telanne and Mr. Petteri Walldén were re-elected as members of Teleste Corporation's Board of Directors.  Ms. Marjo Miettinen was elected Chair of the Board in the organisational meeting held immediately after the AGM.

Authorized Public Accountants KPMG Oy Ab continues as the auditor until the next AGM. Mr. Esa Kailiala, accountant authorized by the Central Chamber of Commerce of Finland, was chosen auditor-in-charge.

The Annual General Meeting decided to authorize the Board of Directors to decide on repurchasing the Company's own shares as proposed by the Board. Based on this authorization, the Board of Directors may repurchase a maximum of 1,200,000 own shares of the Company otherwise than in proportion to the holdings of the shareholders by using the non-restricted equity through regulated market on NASDAQ OMX Helsinki Ltd at the market price prevailing at the time of acquisition. This authorization of purchasing is valid for 18 months from the date of the decision.

Outlook for 2015

The business objective of Video and Broadband Solutions is to maintain its strong market position in Europe and to strengthen this market position in selected new markets outside Europe. Network capacity will continue to increase, driven by the new broadband and video services provided by the operators. Our new products in line with the Docsis 3.1 communication standard allow the cable operators to increase their network capacity competitively. Price erosion in the market continues. Changes in the value of the euro, particularly against the US dollar and the Chinese renminbi, affect Teleste’s competitiveness, on the one hand, and product manufacturing costs, on the other. The positive trend in the video security and rail information markets continue, but the public sector decisions concerning initiation of projects may be delayed by the current economic situation. In addition to organic growth, we estimate the Mitron acquisition to increase our net sales by more than EUR 22 million and its impact on our operating profit to be positive.

As to Network Services, our business objective is to further develop the operational efficiency and increase the share of those services that provide our customers with higher value. In line with this objective, we will continue to expand the new services business in the UK. We estimate the demand for all-inclusive network services in our key target markets to continue at least at the previous year’s level.

We estimate that net sales and operating profit for 2015 will exceed the 2014 level.

29 April 2015

Teleste Corporation           Jukka Rinnevaara
The Board of Directors        President and CEO

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. Teleste has prepared this interim report applying the same accounting principles as those described in detail in its the consolidated financial statements. The data stated in this report is unaudited. The changes in IAS1, IFRS13 and IAS19 have been applied in this interim report and they do not have any material impact on the financial reporting.

CALCULATION OF KEY FIGURES            

ADDITIONAL INFORMATION:
CEO Jukka Rinnevaara, phone +358 2 2605 866 or +358 400 747 488

DISTRIBUTION:
NASDAQ OMX Helsinki
Main Media
www.teleste.com