Description

Net Insight (NETIB.SS) is an underfollowed small-cap Swedish technology company with terrific prospects.  With no analyst coverage, the company has somewhat of a retail following in Sweden and trades quite liquidly but is not well understood by the market.  While other Nordic technology names that I follow including Crayon (CRAYN.NO) and Nordic Semiconductor (NOD.NO) have their earnings calls in English, Net Insight still has its in Swedish so is not catering to the US shareholders (of which I suspect the base is only us).  The company’s stock does react positively to good news as showed in November 2021 when it popped on a good earnings report and the announcement of its biggest deal ever with new customer Turk Telekom.  Q4 was a little tougher with some sales delayed by supply chain issues and the stock retreated from 7 to 4 SEK.  Q1 was a great quarter and the stock reacted in a muted way but still stands far from its highs and at a massive discount to what I think intrinsic value is. 

Net Insight has a core media transport business with high gross margins (62%) that is growing and also has a nascent 5G synchronization business that receives no value in the current stock price.  Crister Fritzson came in as CEO in April 2020 and has been turning the business around with focus on both product development as well as commercial execution.  The founder of the company and developer of its technology remains as CTO, but Crister has brought in an experienced commercial team to drive sales of the business.  Coming out of last fall’s planning session, the company targeted 10% revenue growth with 10% operating margins for the mid-term, both of which have been essentially reached in the latest quarter with 27% organic revenue growth and 9.7% operating margins.  At its annual planning meeting this fall the company will come out with new growth and profitability goals.  Based on my model the company trades at 2x 2023 sales and 11x EBIT, both of which are inexpensive for a high margin growing media transport business and giving no value to the 5G synch business which already has a big initial customer in Turk Telekom.

Net Insight’s media products are used to transmit real-time events such as sports and news over the cloud through either a dedicated fiber network or over a public IP network from the event site to a network hub located elsewhere.  The company is benefitting from a shift in this type of work going from satellite transmission to transmission over the cloud.  It is both less expensive and has less latency to transmit these events over the cloud versus via satellite.  Most broadcasters currently use a dedicated fiber network for these events to guarantee transmission quality and low latency but there is beginning to be a move to using shared IP networks which are less expensive.  Net Insight has a variety of products at different scales to fit any network needs.  The Nimbra 400, 600, and 1000 are the company’s primary hardware platforms with lots of embedded software functionality which explains their high gross margins.  Net Insight’s Nimbra Edge and Aperi products are used for IP networks and are seeing increased demand currently.  Marquis customers include NBC, the BBC, Tata, LinkedIn, China Unicom, and Aljazeera.     

Synching audio and visual footage is extremely important for media technology such as Net Insight’s and the company has become an expert in synchronization over the years.  The company is taking this knowledge and productizing it for use in synchronizing 5G networks.  5G networks use time division multiplexing (TDM) which requires microsecond synchronization between nodes to work properly.  3G and 4G networks mostly used frequency division multiplexing (FDM) which is a lot more forgiving in terms of timing than TDM.  There are 3 ways telcos can address the 5G synch challenge.  First, they could make sure all of their routing and optical equipment supports the new timing requirements.  This would require forklift upgrades of much of the equipment and would pose problems when using leased gear.  Second, they could use GPS (global positioning satellite) receivers at each node.  GPS is however, prone to interference and can also be hacked by malicious actors so telcos are looking for a different solution.  The final solution is to use an overlay synch network, which is backed by the kind of equipment Net Insight has developed.  This solution is immune to hacking, cost effective, and does not require expensive forklift upgrades.  In November 2021 Net Insight signed a landmark 220 million SEK ($25 million) deal with Turk Telekom to develop and install 5G synch devices using Net Insight’s proprietary overlay technology.  This was the company’s largest deal ever and it demonstrates the value of its synch technology.  As this is new area for telcos, Net Insight is the evangelist in this market.  It is finding it can make additional revenue by consulting with the telcos on these solutions.   

Net Insight has demarcated a 5G synch market size of $1 billion over time.  Given that the company has a $150 million market cap (with $35 million in net cash) and is currently the only player in the market this is very significant for shareholders.  The fact that this business is a free option given the current stock price is even more attractive.  So what is Net Insight worth in the aggregate?  I would value its media business which grew 27% organically in the last quarter at 15x 2023 EBIT so 1,650 SEK plus net cash of 350 SEK for a total of 2,000 SEK.  The company is targeting a subset of 50 most likely telco customers now for its overlay synch products.  The Turk Telekom deal was worth 220 SEK in revenue to Net Insight so let’s say it could get 10 similar deals for a total of 2,200 SEK in revenue.  Valuing this revenue at 2x sales gives you incremental synch value of 4,400 SEK.  Adding that to the rest you get a grand total of 6,400 SEK, or 17.00 SEK per share or 300% upside from current levels. 

Catalyst

The most likely catalyst would be another large win for the company's 5G synchronization product.  Other than that another 20%+ revenue growth quarter could be a catalyst too.