Frequentis Aktie: CEO Talk mit Norbert Haslacher - Phantasie durch Drohnen&Co

Yes, thank you very much for the invitation. My name is Norbert Haslacher, I am the CEO of Frequentis AG, I am 51 years old, married, two children, and I have been with Frequentis for six years.

Well, I have to confess, I didn't know Frequentis when I was approached by a headhunter in 2015. I was previously with a US IT corporation for 17 years, a lot abroad, USA, UK, also in Germany for many years, and I didn't know Frequentis. But I was quickly enthusiastic when I had my first meeting with the owner of Frequentis, where I understood what Frequentis actually does: namely, the safety of passengers, or the safety of emergency forces, or safety at sea, to accomplish and support with our systems. And I was immediately fascinated, I must say. And I joined Frequentis in 2015 as Chief Sales Officer, and since 2018 I have been CEO. And I must say, by far my biggest highlight so far was of course the IPO in May 2019. That is a special thing when it succeeds. As I said, the product is very, very important and is used a lot.

Yes, that is very important. Frequentis has a very clear strategy: four safety-critical control centers in five industry sectors. One is the area of civil air traffic control, then also military air traffic control, the public safety area, all emergency services, fire departments, rescue centers, and police command centers, maritime control centers, and also railway control centers. I didn't know that before either, but it's fascinating what is done there to ensure the safety of citizens or passengers. You simply have to go to a control center; there are control centers you can visit. And the fascinating thing is that these control centers worldwide are a very large market because every country has to operate them as critical national infrastructure in these five areas and ensure them. You can also see that in the quality of this company. We have 900 employees in Vienna alone, of which 35 nationalities are employed here, and 2,200 people are distributed around the world. So you can see this focus on control centers in the safety-critical area. That is the position of Frequentis; we do that worldwide. And in principle, the task we have is to provide software applications to give the operator sitting there the best possible information for his or her decision. Communication, if you have no power, that is probably the largest business area.

There is on the one hand voice communication and on the other hand data communication. Frequentis is active in both segments. Voice communication is actually where we come from. After the Second World War, in 1947, the company was founded, so it has existed for over 70 years. It was important to ensure civil air traffic to and from Vienna. And it is about a control center, for example the Area Control Center in Vienna, which is responsible for overflights, to connect with the towers in secure communication, but also to ensure communication with the pilot in the aircraft. It is important that these systems are always available because if you ask a pilot what is the most important system in the aircraft, most will answer: voice communication with the air traffic controller. That is my only human connection to the earth. Everything else is data, but if I feel uncomfortable whether that data is all correct, I always have the possibility to speak to a controller on the ground, and this communication must always work. The same applies to emergency services. There it is about getting resources to the scene as quickly as possible, so time plays a very big role. Therefore, the resilience of such systems is very important, but also sending the right resources. It happens often enough that in fires or rescue operations, wrong resources are sent, and that is not good for the safety of the person in need. Our communication solutions focus primarily on fail-safety, but also on enabling police, rescue, and fire services to be combined in a group call with different technologies. One may have a mobile phone, another analog radio, another digital radio; they can still communicate with each other in a group, so that everyone knows where the operation is taking place and what is essential to help that person in need.

The end product: if you sell it to an airport, do you sell hardware with a software solution? Is it a one-time revenue or what is the share of what you can bill annually versus what you sell once? How does the end product work? Frequentis has more than one product; we have 2025 products in use. Control centers are structured quite similarly, whether in the USA, Australia, Singapore, Vienna, or Frankfurt. Such a workplace has on the one hand the area of voice and data communication, on the other hand the so-called situation awareness, meaning radar data, sensor data, video data are integrated to provide the operator at the workplace with as much information as possible about the situation on site. Because the controller never sits at the scene of the incident, but hundreds of kilometers away. So it is important to provide that person with the right decision-making basis. There is the area of planning tools where historical data and intelligence data are provided from the past so that the person can make better decisions. Underneath, a secure network. The market is huge: worldwide, the market is about 13 billion per year in tenders, and Frequentis can address about 2.5 billion with its current product portfolio. We do that with 500 customers in 150 countries worldwide. We are in the middle of a transformation; that is probably also the reason why the owner brought in a man like me from the software industry. We are in the middle of a transition from hardware-centered systems to software-centered systems. So to answer your question correctly: what is the revenue share and what is the maintenance business behind it? We see that our industry is moving more towards virtualization and digitalization. The incubators of the commercial automotive and financial services industries of the last 15 years, like big data, security, are now moving into the security policy area, which by its nature is a very slow and very risk-averse area because resilience and system availability play the biggest role. Where we already have software business, we have about 20-30% software license share, then about 40-50% service share, and a very small hardware share of classic systems. And that is how it is: when we win a tender (95% of our projects are public procurement procedures), we usually have that customer for 15, 20, 25 years and build on those contracts with change requests, expansions, live upgrades, and of course software maintenance topics. Where we are still stronger in proprietary hardware, we still have a production chain for microelectronic components in Vienna, production of circuit boards for safety-critical systems. There, the hardware and the repair or replacement of hardware is still the business model. Currently, we are at 60-65-70% software share and moving more and more towards 100%, which strongly depends on the speed at which customers can implement digitalization in their own organizations. And looking ahead five to six years, I think you can say it is predominantly a software company with nice models. If it runs for 20-25 years, the initial setup costs more, but probably over the 25 years the revenues from the 25 years are more than what was in the first year. Absolutely. There is a good example: a large police force in Europe originally tendered a control center in the capital; the contract value was 4 million euros. Last year we signed 120 million on the basis of that contract because it went into a rollout, more workplaces were created, new technologies were used. That is a typical model of how our industry works.

That is a good question. We presented this story to potential investors in the context of the IPO, and it has not changed to this day. The worldwide control center market, as I said, typically tenders 13 billion euros in products. The big advantage of Frequentis is that we have had a strong customer base for over 70 years: 500 customers in 150 countries. That is a great customer base, and customers and Frequentis usually work together for 10, 15, 20, 30 years, so we know each other. The idea was always to develop new products through M&A transactions or organically to make more and more of this 13 billion addressable with our installed base. There are products we have had in our portfolio for a very long time, like the voice communication system for air traffic management. For air traffic control, we have a market share of about 36%. Then there are systems like messaging systems that exchange data worldwide between air traffic controls; we have a 70% market share. On the other side, there are very new software technology solutions like the e-Motor, where you can operate a tower from an office. In that market, we are just at 10-15% market share. It depends very much on the product. And the same is true for the competitive situation: the e-Motor has completely different competitors than the voice communication system. And I think that is what makes Frequentis so interesting: we are a company that focuses exclusively on the control center segment and builds its product portfolio there, and can therefore offer many products from a single source in combination, whereas competitors have to find partners somewhere on the world market to be able to bid in tenders. I find that an exciting concept.

The trend is enormous. There are some analysts, especially from the USA but also from Asia and Europe, who predict about 30 to 36 percent growth per year in this remote tower segment over the next ten years. You have to understand, we are an industry that is usually very slow, but also because of strong regulations behind it. You cannot simply use any software because human lives are at stake. That means this software must be tested by the supervisory authorities according to corresponding regulatory requirements. The remote tower example is a good example. We started developing this technology with German air traffic control about seven years ago, and it took until 2019 for German air traffic control to be allowed to use this system, approved by German air traffic control. Saarbrücken was the first airport. Anyone who flies to Saarbrücken will notice there are no controllers at the tower; the controllers are in Leipzig, 400 kilometers away. This technology has several use cases. On the one hand, it increases safety for passengers because at night, a controller sitting at the tower would take binoculars to assess safety on the runway. With sensors, night vision, infrared, the controller sees much more than with the physical eye, and that increases safety for passengers. On the other hand, there are cost savings, especially at airports in Asia that are series mod, where there is little air traffic but still a strong mobility need for people to fly to cities. There, the use case is to combine several airports into one center to manage multiple airports with one controller team. There is also the problem at large airports that there are certain areas that cannot be seen, which is a safety risk. With this technology, large airports can be equipped with cameras and sensors, giving controllers the ability to look at those blind spots so that nothing can happen. The systems must always work. But air traffic control is the largest revenue area for Frequentis. Last year we made 300 million euros in revenue, of which about 65-70% is the ATM segment, which includes military and civil air traffic control, because especially in Europe and Australia, the trend is to use infrastructure for both civil and military air traffic control together. We cluster that in reporting as the ATM area. The second segment is PST, which includes emergency services, maritime, and rail. That makes about 35-40%, depending on the budget allocation cycle of the authorities, it varies somewhat from year to year.

And this exciting business in drones is one of our main investment areas. We have been investing in this segment for about three to four years, are still in the standardization committees at the European level and also in the USA with NASA in joint research programs. Last year we also won the first operational project in Norway, where we are equipping 16 airports with these technologies. What is it about? Drones, and you are absolutely right, in five, seven, ten years there will probably be more drones in the air than other air participants. It is primarily about so-called beyond visual line of sight flights, not like my children flying drones over our own property where they can see the drone. It is about drones following a specific flight plan, flying a specific route without the person controlling the drone being able to see it physically. That is called beyond visual line of sight. And it is about use cases. For example, we had the first test in Germany with a fire department that sends the drone autonomously to the place where the fire broke out to get a view from above so they can better define the resources they need to extinguish the fire. That also gives the operator in the control center much more information about the incident site. And this flight must be coordinated with air traffic control because it cannot be that uncontrolled flying objects are flying in a regulated airspace where a Boeing or Airbus with 200 passengers is flying. That is an enormous safety risk. That means there must be a connection between the so-called UAS traffic management area and the ATM traffic management area. And Frequentis is optimally positioned there because we come from the regulatory area, we know what requirements ATM has, we now know the technology that UTM needs, and this is not a German or Austrian topic, it is a worldwide topic. We know how to integrate this data into a system so that an operator can trigger certain release procedures or safety procedures to ensure nothing happens in the air. That is where we as an ATM provider probably find it easier to enter the UTM area. In the UAS area, there are thousands of competitors, but they also disappear within a year because many of them cannot handle the ATM systems due to complexity and lack of references. We believe we are best positioned. And you are absolutely right, the market will be huge. We don't know exactly who our customer will be, whether it will be air traffic control or private companies, but that will be clarified by the EU requirements that are to be implemented nationally by 2023 in the individual European countries.

This is just emerging. The EU is already quite advanced in giving certain regulations to the countries for national implementation in 2022, so that the national countries can implement them in 2023. But what is crystallizing is that there are on the one hand the drone manufacturers, who must meet certain requirements regarding data transfer from the drone to wherever. Then there are the so-called drone operators, those who use the drones produced by someone for specific purposes. That starts with inspection flights for railways, transport, public safety, emergency services, fire departments, and Amazon and Google are reporting whether the market will come quickly. But I think emergency services will use them faster, or photography for weddings and such. So those are the operators of these drones. And then there are those responsible for ensuring that this drone traffic can be safely integrated into a regulated airspace. So there will be these three segments. Who is our customer? I think most likely the third area, where it is about integrating the data transmitted by the drone into a system that also maps other air traffic so that conflicts can be detected early and avoided. In the military area, in Turkey there is a conflict where drones are already being used, but that is not really included. Autonomous aircraft in the military area have existed for almost 20 years. I remember sitting on a podium with a pilot from Eurowings who said his main route was Frankfurt-Baghdad, and on every third flight he saw a military drone somewhere in the air. Thank God they didn't collide. So when hundreds, thousands, hundreds of thousands of drones are in the air, you cannot allow that. There must be strong control so that no one is in danger.

For the drone market in the next few years, it's really hard to estimate; it's like reading coffee grounds. But we have grown about 8% in recent years, and the market grows 3-5%, so we have grown almost twice as fast as the market itself. We have also made a few transactions that contributed inorganic growth. As a listed company, we don't give guidance, but we feel very comfortable with what our banks that cover us, the analysts, say: they say we have about 7-8% growth ahead of us in the next few years, and also around the 7% mark medium to long term. You have to understand, we have to invest in R&D to manage this transition from hardware-centered to software-centered systems. That costs money because what was hardware must now be translated into software. We are in the middle of that, it will take a few more years, but the market expectations that are seen for us, we feel very comfortable with.

Yes, that was a huge shock, and I feel terribly sorry for the people who work for us, our employees. We had a great year 2020 in terms of profitability, and then came this insolvency of a bank where we had part of our cash. We then wrote it off completely so that we don't carry any legacy into the next year. So the issue is settled from a balance sheet perspective. We have engaged law firms and filed initial lawsuits. I always say there can only be positive surprises from this bank scandal. Normally, when a bank goes bankrupt, there is usually something, especially if you are not involved in equity but as a normal customer, that can lead to a positive surprise. It is actually a one-time event.

One risk for us is certainly the topic of Corona still, because I just spoke to a customer in Australia yesterday who said he can't stand this lockdown anymore. They were in lockdown for 200 days last year out of 365. And it's always city-dependent, one time Melbourne, then Sydney, and they are just in lockdown again. That is a risk for us because we cannot fly to our customers and in certain projects we cannot get the acceptance as we wish. I think last year showed that we handled it superbly, and the flexibility of my colleagues was gigantic. They sometimes needed days to get into a country to help the customer on site to put the system into operation, and then needed days with quarantine in various countries, I think two weeks until they were home again. It's incredible what flexibility they showed. But the customers are also affected; they are sometimes at home in home office, so the process lead times for public procurement procedures are simply long. And even though many customers have now learned to accept virtual project acceptances, which was really great, no one thought three years ago that a safety-critical customer would accept a project via video, but it worked in 2020 and also in 2021. Nevertheless, we see it as a brake. It's not that investments are massively declining because we are not working for airports or airlines; we are responsible for national air traffic control that must provide infrastructure regardless of whether 100 or 1000 planes are in the air. But the willingness to invest and the speed of investment have naturally decreased. And if a fourth wave comes, we have to look at it globally, not just Germany or Austria, but the countries where our other customers are. That is a risk for me. I hope that vaccination rates or this bandwagon effect will work. You also have to understand correctly: if you say Frequentis' main customers are somehow tied to airports, and if the flight market goes down 20%, that's not good. But actually, the end customer is the state, and the cycles are very long. It could be that if in the next ten years the flight market halves, which none of us believe, then probably one or the other tower won't be built. But probably in two to three years it will recover. And whether such a dip in 2024-2023 occurs, Frequentis, as seen in the numbers, is relatively close. And you must not forget, you have to look at it globally. Look at Asia: not a month goes by without a press release about a new airport being built. The mobility need in Asia is much greater than the current infrastructure. Vietnam is building a mega airport for 500 billion US dollars outside Ho Chi Minh City. Infrastructure is being built with enormous catch-up demand. So if you look at it globally, I think it will balance out well between North America, Europe, and Asia.

Yes, I am of course a shareholder of Frequentis. I own 15,000 shares myself, and also through the long-term incentive program, I am paid in shares. And I have not sold any to date.