Teleste’s risk management policy defines the objective of risk management as the achievement of strategic objectives. The principles and objectives of the Group’s risk management are subject to approval by Teleste’s Board of Directors. Risk management aims to ensure the achievement of business goals, so that any material risks affecting business operations and posing a threat to the achievement of goals are identified and continuously monitored and evaluated. The company has risk management methods in place to prevent the materialisation of risks. In addition, insurance is used to cover financial risks and other risks that are reasonably insurable. Regular, cost-efficient evaluation and management of risks are emphasised in Teleste’s risk management policy. Risk management supports the business operations and generates added value that promotes decision-making and goal-setting by the management in charge of business operations. Monthly reporting constitutes part of the internal control and risk management system. In particular, it is used for the monitoring of the development of orders received, order backlog, deliveries, net sales, profitability, trade receivables, working capital and cash flow and, consequently, the development of Teleste Group’s performance. The Board of Directors annually reviews essential business risks and their management. Risk management constitutes an integral part of the strategic and operational activities of the business units and Group functions. Risks are reported to the Board on a regular basis.
Teleste’s risk management system covers the following risk categories:
- strategic risks
- operational risks
- financial risks
- hazard risks
For each identified risk, the Management Group confirms a risk owner who is responsible for risk assessment, selecting the risk management strategy, planning risk management actions and assigning responsibilities for them, and risk monitoring.
Teleste ́s Board of Directors has updated the company ́s risk factors in the financial statement release 10 February, 2022.
Key business risks
Europe is Teleste’s main market and business area, and the company aims to expand its business in North America. Teleste’s customers include data communications operators, public transport operators, train manufacturers as well as certain public sector organisations and authorities.
Teleste’s strategy involves risks and uncertainties, for example that new business opportunities may fail to be identified or successfully used. The company must strive to anticipate changes in the market and react to them. Periods of technological transformation, such as data communications operators migrating to next-generation distributed access architecture in access networks, may significantly change the competitive positions of the current suppliers and attract new competitors to the market. Increasing competition may also lead to intensifying price competition, which may affect the profitability of the business. Correct technology choices, product development investments and their timing are vital to success. Product development involves calculated risks and should they materialise, the value of the product development investments can decrease. Expanding business operations to new markets is demanding. The Group’s investments in growth in the North American market will not necessarily lead to the desired results.
In the technology and product business, client-specific and integrated deliveries of solutions create favourable conditions for growth, even if the involved resource allocation and technical implementation pose a challenge and therefore also involve risks. Data communications operators’ network investments vary according to the development of technology, customers’ need to upgrade networks and their capacity to invest. Increased competition created by new service providers may reduce operators’ ability to invest. The demand for video security and information solutions fluctuates in response to market cycles and the main clients’ ability to invest. End-to-end deliveries of systems and projects may be large in size and take place over several years, setting high demands for the project quotation calculation and management and, consequently, involve risks. Various technologies are used in Teleste’s products and solutions, and the intellectual property rights associated with the application of these technologies can be interpreted in different ways by different parties. Such difficulties of interpretation may lead to costly investigations or court proceedings. Customers have very demanding requirements for the performance of products, their durability in challenging conditions and their compatibility with other components of integrated systems. Regardless of careful planning and quality assurance, complex products and solutions may fail in the customer’s operational environment and lead to expensive repair obligations. Teleste is also committed to its customers’ high requirements for quality and delivery reliability in the services business, which requires a highly effective service process management system and continuous process development to ensure the quality and cost-efficiency of services. This, in turn, requires continuous development of the skills and knowledge of our personnel and subcontractors. In addition, the sufficiency and usage rates of our personnel and subcontractor network influence the delivery capacity and profitability of services. Subcontractors’ costs may increase faster than it is possible for Teleste to increase the prices of its services to its own customers.
Several information systems are critical to the development, manufacture and supply of products to customers. The maintenance of information systems and deployment of new systems involve risks that may affect the ability to deliver products and services. Information systems may also be exposed to external cyber security threats, and we strive to protect ourselves from these threats through technical solutions and by increasing the security competence of our personnel. Teleste Group may also be targeted by illegal activities and fraud attempts that could have a significant effect on the financial result. The Group strives to minimise these risks by continuing to develop good governance practices and increasing the security competence of its personnel. The development of personnel competence, employee engagement and recruitment involves risks that influence how competitiveness is maintained and developed.
Natural phenomena, accidents (such as a fire or a flood) and other global disruptions, such as pandemics, may reduce the availability of various materials or components in the industry’s order-delivery chain or suspend our own manufacturing operations. Fluctuations in demand in the global economy may lead to sudden price increases for raw materials, components and freight, whose negative impact on the gross margin Teleste cannot eliminate by increasing the prices of its products or project deliveries. The challenges related to the availability of raw materials and components that began in 2020 have continued and further expanded. According to the company’s assessment, risks and problems associated with component availability may continue to present significant delays in deliveries and business profitability challenges. Geopolitical changes, such as customs levies imposed by different countries and changes or restrictions on exports or imports, may have a negative effect on component supply chains and the profitability of products. Many competitors in the provision of access network technologies come from the United States, which is why the exchange rate of the euro against the US dollar has an effect on competitiveness. In particular, the development of the exchange rates of the US dollar and the Chinese renminbi against the euro influences product costs and result. The company hedges against short-term currency exposure by means of forward exchange contracts and stock options.
The COVID-19 pandemic continues to present risks to Teleste’s supply chain, the company’s own operating capacity, the operating capacity of customers and the demand for Teleste’s products and services. Thus far, in response to the restrictive measures imposed by the authorities in various countries due to the COVID-19 pandemic, operators have reduced or suspended their broadband network construction, while certain customers in public transport information solutions have been forced to close down their factories and delay projects. Our personnel and our in-house production activities have mainly remained operational. Although the direct impact of the pandemic on Teleste’s operations has so far been limited, disruptions in the supply chain of electronic components and many other materials have affected and may continue to affect Teleste’s delivery capacity.
The Board of Directors annually reviews essential business risks and their management. Risk management constitutes an integral part of the strategic and operational activities of the business areas. Risks are reported to the Audit Committee and the Board of Directors on a regular basis.
In the period under review, no legal proceedings or judicial procedures were pending that would have had any essential significance for the Group’s operations.