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1 August 2019

Netgem has new biggest money-maker amid another revenue nosedive

Netgem just cannot publish a press release or financial filing without attracting controversy. Not only has the French multiscreen vendor wiped its investor relations page clean following the transfer of its multiscreen platform business to Vitis earlier this year, but it has also changed the way it reports results to cover a few tracks.

Once you scratch away at the abstruse surface, we can see that Netgem has fulfilled our previous assertations that VideoFutur, the fiber services business, was on the cusp of becoming Netgem’s pièce de résistance – blossoming in the second quarter to become the vendor’s biggest bread-winner.

Netgem reported first half 2019 results this week showing sustained revenue declines of €9.9 million to €13.1 million, an alarming 43% shrinkage, with VideoFutur contributing €6.8 million, up €3 million year on year. Netgem decided not to break out quarters separately, so going back to our coverage of its Q1 results, Videofutur revenue was reported as €3 million – meaning Videofutur brought in €3.8 million of revenue during Q2, from total revenue of €6.5 million.

As a result of its impressive growth and revenue declines elsewhere at the company, VideoFutur accounted for 58.5% of total second quarter revenues, rising from the 45% near-majority it achieved in the first quarter. For context of VideoFutur’s rapid rise, in Q1 2018 the business contributed a 19% share of total quarterly revenue.

But that is just the beginning. Netgem this week confirmed its ambition of achieving €30 million in annual VideoFutur turnover by 2021. At this run rate, VideoFutur could be on track to becoming a €6 million a quarter business in 2020 and surpassing €7 million a quarter the following year – making an annual turnover target of a €30 million entirely achievable.

How exactly does it plan to get there, though? This is all well and good, but it glosses over the fact that overall revenue and net income have been spiraling downwards consistently.

Netgem has teased the unveiling of more upscale equipment adapted to the specific fiber market in the coming months, relating to the commercialization of traditional set tops which has caused a sharp reduction in operational costs and long-term contracts. This new connected equipment will be marketed as part of rebuffed business models combining the sale or rental of equipment with value-added services – citing Finnish operator Elisa as one renewed contract for which Netgem delivered a next-generation 4K HDR set top in Q2.

Netgem is also charging into the UK market hard and fast, claiming it signed contracts with local fiber operators to provide them with NetgemTV’s global cloud-based management software for connected home services – citing the UK’s advanced fiber deployment catch-up plan as a lucrative opportunity.

But the situation is muddied because earlier this year, Netgem shareholders approved the transfer of the multiscreen platform business to Vitis, the specific subsidiary which houses the VideoFutur division. On last count, Netgem held a majority 53.2% share in Vitis.

That said, on the multiscreen platform side, Vitis has launched a number of new customer offerings to bring features like time-shift and nPVR without requiring any hardware, yet still we reserve some doubts about the credibility of the video business going forward given the fiber emphasis.

It’s worth revisiting the Netgem strategy for context. It recently separated out netgem.home, covering connected devices;, the TVaaS business; and Vitis, the French fiber ISP and content provider. As we said at the time of its first quarter 2019 filing, it appears the latter two businesses are in the process of merging, while the former, which provides TVaaS to operator including the UK’s EE and Ooredoo Oman, could soon be spun off or sold. Its latest set of results reaffirm this view.

While reporting Vitis/VideoFutur revenue, the filing notes that net income from Vitis is not included in net consolidated income of the group, which came in at negative €2.4 million, a 2.1% year on year decline.

VideoFutur’s growth appears to have directly influenced the recent CEO switch, as Mathias Hautefort moved from his position as President of Vitis into the Netgem driving seat. Clearly this is about implementing sweeping services-centric business changes across the majority of Netgem operations, considering how more than 50% of net revenue in Q1 came from services for the first time in Netgem’s history. Unfortunately, Netgem did not break out services figures in the latest filing, but did note that VideoFutur is now available for marketing on more than 1.2 million access points and distributed in some 40 French départements (administrative regions).

“​The new range of multiscreen services, associated with high-end equipment, and with new business models must allow the Netgem Group to take advantage of the growth of the very high broadband market and the emergence of new operators​,” commented Netgem CEO Mathias Hautefort.

Netgem never responded to our queries for comment as we continue in vain to nail down an interview with Hautefort or indeed estranged co-founder Joseph Haddad, who recently moved to the position of Chairman, keeping himself at an arm’s length.