Cloud migration knocks Netgem – gearing up for growth, cash down

Netgem’s evolution from a set top manufacturer to pure video software supplier has been a public ambition of the French vendor for some time, but is the company’s mixed set of full year results a sign of the initial cloud migration having a negative impact on business? More importantly, can vendors preparing to embark on a similar transition learn from Netgem’s story so far – in its mid-transition state?

Netgem declared that before the close of 2018, its transformation to a full TV-as-a-service provider will be completed. We first learned of Netgem becoming a serious software player when it won a deployment at ZTE in May 2017 for Mexican ISP TotalPlay – its debut software licensing deal on third party set tops. Since then, Netgem has increased reliance on Microsoft Azure cloud infrastructure by putting its Diamond entertainment platform in the cloud, gradually adding more features such as recommendations and fine tuning its back-end capabilities to create more recurring revenues.

Netgem is also investing R&D efforts into enhancing algorithms for content suggestions from its own audience measurement platform, according to Netgem Managing Director Sylvain Thevenot speaking to Faultline Online Reporter before the turn of the year, although he was careful not to drop in any AI and machine learning buzzwords.

Surely the survival of a software company adapting from pay TV to OTT video is an easier task than one completely shifting its core business from hardware to software? From what we are seeing in the industry, this presumption is not necessarily true, with the recent catastrophe at Ooyala the most apt example.

Cloud pricing is decreasing, but is still a pricey affair, contributing a blow to Netgem’s full year revenue, published late last week, of 17%, down to €61.8 million ($76 million). Meanwhile, Netgem reported solid operating income growth of 14% to €6.3 million ($7.8 million) for fiscal 2017. The company’s operating income spike was partly driven by a 17% reduction in operating expenses to €18.3 million ($22.6 million), which in turn was driven by the “deconsolidation” of Vits, the service provider of La Fibre Videofutur.

Netgem recently denied it was attempting to sell off the French VoD service Videofutur (again) and its associated TV, fiber internet and telephony services, instead claiming a joint organization is being formed with investors. However, Vits has not been included in Netgem’s consolidated figures since November 2016.

Once Netgem has completed its software transition, we feel one of its biggest challenges for 2019 will be convincing customers to take its own platform over Android TV. Netgem has previously warned about what Google’s real intentions are – questioning why service providers should want to give over valuable user data to Google for the sake of convenience. Others have not been so resistant.

Netgem clearly takes a different rational when it comes to Google’s tech rival Amazon, having integrated Alexa last year for its UK operator customer EE.

Hinting the next few years will be a bumpy ride in terms of financials, Netgem stated generating cash is no longer its top priority, with growth the new primary objective. The company expects 2018 to be a turning point, with multi-year growth fueled by a combination of its SaaS transformation and new OTT initiatives. This is reflected on net income, which was down 26% in 2017 to €4.7 million ($5.8 million). “Value now results from content and technology services derived from the usage of the TV service by the end user, while any hardware revenues reflect the direct or indirect acquisition of a new customer and is no longer considered a value driver for the group,” said Netgem.

The statement added, “OTT means that next generation entertainment packages can and will be unbundled from broadband packages, opening new distribution opportunities. Depending on each local market situation, the group will seek to address some of these opportunities, directly or in partnership with its customers. New opportunities include TV bundles with mobile packages or TV bundles with consumer devices.”