The quarterly figures came in roughly in line with Redeye’s estimates on top line, but slightly below on adj. EBITDA-CAPEX (preferred profitability metric) which landed on SEK60m and a margin of 25%. While we knew that Networks were going to show strong figures after the NDL order from early July, Security surprised positively.

Security grew by 15% y/y. While revenues from both Licenses and Professional Services grew by c4%, the mostly recurring revenues from Support & Maintenance increased by almost 50% y/y. This indicates that the growth was not from any one-off income, but rather an indication of a robust underlying business.

Network grew by 25% y/y, purely driven by increased license revenues. This was naturally driven by the recent USD2.9m order in 5G Network Data Layer. As such, the underlying growth is not of as high quality as in Security.

Enea's growth in Networks is much dependent on telcos moving from using large one-stop-shops (e.g., Ericsson) to multi-vendor solutions where each component is meant to be optimized (best-of-breed solutions). In uncertain times, such as the one that have been present for the last couple of years, clients tend to go with the "safe" bet, i.e., the big players. Now, Enea appears optimistic about the pendulum of this cycle turning towards clients considering solutions from a blend of smaller players like Enea.

Sales from Operating Systems continued to decline. Sales came in at SEK18m, corresponding to a y/y drop of 30%. This is a continuous drop that is expected as customers introduce open-source software for new products.

Gross margin landed on 80%. We have started to include “other operating income” in this metric. The reason why is that negative currency effects on accounts receivable are included in COGS, while the positive effects are placed as "other operating income". As such, we think it is fair to include both parts. The strong figure was driven by the one-off license deal in Networks.

Reported OPEX, incl. D&A, was SEK157.7m, and “clean” OPEX (excl. D&A) was SEK114.5m. However, Q2 included a one-off reservation of doubtful debt of SEK8m - which made reported selling expenses SEK8m higher than the underlying figure. With SEK20.5m in investments in intangibles, the total cost base was SEK127m.

Outlook remains unchanged with "30%+ EBITDA margin and strong cash flow" for 2024, and "double-digit growth and 35%+ EBITDA margin" thereafter. Our impression after the conference call is that the pipeline remains strong - even after the NDL deal was struck in early July. As such, we would not be surprised if similar sized deals would come during H2.

In the quarter, Enea reclassified its interest-bearing debt from long-term liabilities to short-term ones. With net debt of SEK144.5m and rolling-12-months' EBITDA of SEK290m, net debt/EBITDA is down at 0.5.

Assuming a ceiling of Net Debt/EBITDA of 2.0, we think Enea can make acquisitions worth SEK450m. Considering the current market sentiment, with valuations coming down also on the private market, we deem it possible to acquire a company at a multiple of 2.5x sales, which would add around SEK180m to Enea’s revenue base, or around 20% to total sales.

Regarding possible M&A targets, Enea appears to be open for something in cybersecurity, particularly a company with strong presence in South America, parts of Asia, or possibly North America.

Last weekend, the Wall Street Journal reported that Google is closing in on a billion-dollar purchase of cybersecurity startup Wiz, in a deal that could be the tech giant's largest acquisition ever. According to sources to the paper, Google's parent company Alphabet is in advanced talks to acquire Wiz for roughly USD23bn. Wiz offers cybersecurity software for cloud data.

This is just one of many cybersecurity companies with incredibly high valuations in relation to their sales and earnings (Yubico being another one listed in Sweden - with P/S 19). Considering this, we believe a perception change of Enea into "an exciting cybersecurity company" creates a very substantial upside when valuing Enea. While we believe peer valuations and perception valuations are wrong in principle, we believe they are worth to take into account when thinking about what a perception change may look like.