Q&A General

May 2, 2025 – A few years ago, the Chairman of the Board of Directors gave comments of the company’s current situation on this column (Inderes). Would it be possible to get a similar overview of the current situation? I believe that quite a few investors would like to hear the board’s view on what the company’s current situation is and also its vision for the future.

Medical has fallen short of targets, and we have not been able to correct the situation last year. Corrective measures have been taken and are ongoing. We are not so worried about the decrease in Defence orders – one quarter will not change the whole (e.g. 4Q/24 order backlog jumped).

In Defence, the company aims to be and we are already a reasonably significant player in the tactical communication revolution of the defence forces. If the defence industry is viewed as a whole, it makes no sense to compare us to defence giants. We focus on a targeted segment and we intend to be winners there.

Let’s start with the company’s development trajectory – after the collapse of the product development services business (2017), the company has been able to increase product revenue in line with its strategy and at the same time make strong investments in product development until 2021. As a result of the investments, the result was actually negative the whole time. The cash flow-based result improved continuously due to increasing product sales. The accounting result was mainly slightly positive thanks to capitalizations. The board was particularly concerned at the time about the company’s future financial development, as a result of which the board decided to start mapping out a possible new CEO as an alternative solution – attempts were also made to recruit the current CEO (Petri Toljamo). After the then CEO resigned, a new CEO was appointed in December 2022. At the same time, the board announced long-term financial targets and a timetable (2024) for achieving the targets. The new CEO’s targets for 2023 (cost savings if necessary) and 2024 were clear minimum targets. The new CEO successfully carried out cost adjustments in the autumn of 2023, although the turnover and result for the year in particular were disappointing. The profitability turnaround in 2024 was achieved with a narrow margin, especially thanks to the volume order for SDR products from the Finnish Defence Forces. Development in the Medical and Engineering areas was sluggish. The improvement in results achieved through restructuring is easier if product margins are good and more difficult if margins are poor. The change of CEO (if the CEO wants to continue) generally also reflects a lack of trust on the part of the board. With this change, the board aims to give the executive management a better understanding of the technologies we apply in a broad sense, so that the impacts of decisions on the future can be predicted more reliably. In order for the company to survive in the future, the company’s operations must be increased and things must be done with higher quality, faster, more focused and more cost-effectively.

NATO membership has clearly improved Bittium’s opportunities in international competition. The war in Ukraine and the threat from Russia have raised the appreciation of the defense industry in general and created very strong demand for the sector, in which the company has seen a strong growth in demand and an increase in the size of offers.

After three years, the war between Ukraine and Russia has turned into a war of consumption, in which, among other things, At this stage, the demand for ammunition, missiles, armor and transport equipment has been prioritized in the procurement plans of various countries. Large procurement needs will not be solved overnight, so it is certain that the amount of investment in defense will continue and grow. Bittium’s offering in tactical communication supports in particular the need for reliable, secure, easily adaptable and scalable command and control systems. High data capacity enables comprehensive command and situational awareness, and what we offer is excellently suited for both operational command and, in particular, air defense needs due to its low latency. These are exactly what is needed. Despite the current warfare emphasizing the static characteristics of the war of consumption, Bittium’s tactical communication system is the core of the command and control system in winning warfare. An easily adaptable, comprehensive, internationally compatible and secure mobile command and control system that is scalable to the needs of different operations will soon replace the passive fixed command and control system – the same happened with the wired network. Bittium’s opportunities are very good due to its strong expertise and advanced technology.

In Medical, we are really good at measuring biosignals. Faros has achieved an industry reference position in measuring excellent signal quality. Otherwise, we have not been able to integrate our biosignal expertise to create competitive overall solutions. This integration includes software and licensing procedures, where we have had significant shortcomings. At the same time, it must be noted that FDA approvals in particular have been very difficult for others in certain respects. However, the situation is not lost and we will do everything we can to report positive news in the future. Direction-changing measures have been initiated and parts of them have already been announced. Focusing on action is the keyword.

We have said what we can about Defence’s tenders, BAE cooperation, PV partnership, Nokia cooperation and inorganic growth. When the topic arises, we will immediately tell you more.

A lot has been said in public about Nordic cooperation in the defense sector and we cannot provide any further information at the moment. The northern dimension is an extremely important focus area for the company.

We understand that you find the growth strategy unambitious. We have stated the minimum numerical targets at the company level (LV growth and OP over 10%). We are therefore seeking profitable annual growth in absolute terms (interest on interest). In the current situation, we consider our long-term financial targets realistic and provide a detailed annual growth target and profit range. In 2024, Defence grew by 42.3%, Medical shrank by 12.6% and Engineering by 15.6%. The company’s total revenue grew by 13.2% and profit was 10.1%. The targets at the company level were just achieved. According to our guidance, we will grow at the company level by 11.5–23.3% this year and the operating profit will be over 10%. Based on the Q1/25 results, it could be approximated that Defence will have to grow by clearly over ten percent in order to maintain the guidance. The company believes it will achieve the set goals because the guidance was not changed.

Feb 21, 2025 – Can you comment on the reasons behind the change of CEO?

The Board of Directors and the CEO have mutually agreed not to comment on the reasons for the CEO change. The Board of Directors is convinced that the decision made is the best for the company’s future.

Mar 23, 2023 – Why are R&D costs only increasing?

It is true that Bittium’s R&D investments are significant, especially when the investments are compared to the turnover. The company’s competitive advantage and future growth is based on competitive products, competitors are constantly developing their own products and we have to keep up with this race to succeed.

The graphs below show that, in absolute terms, R&D investments have increased between 2016 and 2019 and have declined since 2019. A similar trend can also be seen in the relative share of costs in turnover. The exception to this trend was last year, when R&D investments increased both absolutely and relatively, but they are still lower than in 2020. The absolute increase in 2022 was around €2.5 M, of which around half happened as planned and the other half was due to delays. The R&D investments of the Medical business area increased their relative share. Product development costs have therefore not continued to grow all the time.

After the collapse of service business turnover in 2017, the core of Bittium’s strategy has been to grow the product business by investing very heavily in product development. The goal has been to increase the product business, whereby the share of product development costs will decrease relatively while staying at approximately the same level in absolute terms. We have succeeded in increasing product turnover from 2016 until 2021 – that is, five years in a row. Last year was the first in Bittium’s history when product turnover decreased (-11%) and service business increased (5%) compared to the previous year. We failed to increase turnover in 2022, so we also failed to reduce the relative share of R&D expenses. Our intention is not necessarily to reduce the absolute amounts of R&D expenses, they may even increase somewhat, but we also do not keep them up unnecessarily.

The absolute level of product development investments will probably not decrease, but with the growth we aim for, the relative level will decrease. There is no special curtain and we open the product development costs, emphasizing our investment priorities, not project by project in detail