4C Group AB (publ)

Good morning and welcome to 4C Strategies earnings call following the release of the Q3 report this morning. My name is Jessica Skytte and I will facilitate today's session. Here in the studio, I have 4C Strategies CEO, Jonas Jonsson. And later on, the CFO, Anders Norgren, will join the stage for the Q&A session. And if you have any questions, please enter those in the chat, which is now open. And we will address them after the presentation. So today we will start with the business highlights. And after that, Jonas will guide you through the executive summary and the Q3 figures. Finally, coming to the key priorities and the Q&A. So, Jonas, could you please introduce some of the quarterly highlights from this period?

No, absolutely. Thank you, Jessica. And thank you, everyone, for joining us this morning. So obviously, looking back at Q3, as you would have seen in the report, one of the main events for this quarter was a, I would say, a very positive outcome and also a positive outlook going forward in North America. We've been talking and I've been talking about the situation and the deals that we've been progressing in the US and in North America over the last quarters. And we're very positive to see that they are now starting to come to fruition. So we saw a very strong Q3 in North America. We've also, and this is important from a slightly longer term perspective, we've also spent a lot of time and effort over the past quarter, but also the previous quarter, to put in significant effort when it comes to our product packaging and enhancements in our go-to-market strategy to really make it easier for our teams inside 4C Strategies to convey the message about what is our product offering and how do we get that to the market in an as easy as possible way and how do we enhance for our customers and the market at large to actually buy our products and understand the value that they bring into the customer organizations that we're working with. And we've also worked hard with with effectivizing and actually coming to terms with the optimizations that we've been looking at and the restructuring across the group of companies within 4C to look at how do we build A4C strategies fit for purpose of where we're going now, where we're going in 2025, and also how do we make sure that we have the right organization set for what it is that we're trying to achieve. So it's been a busy quarter, really positive in terms of the outlook and the outcome in North America, to see that turning point and to see those contracts starting to come in as a result of the budget being passed earlier this year and the hard work put in place by the team both in Washington and in Orlando. very positive about that outcome. There's a lot still to do to end the year, but at large, I think Q3 was a good turning point for 4C Strategies this year.

Thank you. As you just touched upon, 4C Strategies' strategic goal is to expand the COTS space. Could you please explain the difference between customized versus standardized software and how that shift will build for success in the future.

Yeah, no, absolutely. Thanks, Jessica. And I think, so when we talk about our COTS product, it's a little bit different when we look at sort of our resilience domain and our defense domain. But in general, when we look in defense, we can see, and we've touched upon this previously as well, that historically, the requirements coming out from armed forces and defense customers around the world when they are looking at buying software and looking at buying products to help them in training, to help them in readiness and force preparation, the different nationalities have had a very set requirement, which have led to a very project-driven, very development-driven software sales situation. What we've been seeing is a change in that mindset, both in the U.S., in Europe, and in our APAC customers, in terms of actually being more receptive and accepting when it comes to buying COTS software. For us, who has been building ACOT software in the defense training and readiness space for the last 25 years, this change is obviously a pivotal moment when we can say to our customers that we already have the product to a large degree of what it is that you're requiring and that you will be able to use this without actually making all those customizations into your own specific requirement. And This allows us in a much better way to build that solid foundation of recurring revenue in the COTS space, selling the products that we have, and actually expanding that user base in a much quicker way than we can if we need to individually develop the solutions for each specific customer. And especially, I would say, in the North American space, where this has been a slower transition, where we have been forced over the last couple of years into big, development projects into big projects where we've been tailoring software to the customer requirements, we now see a shift whereby the customers and the different commands around in the USDOD are actually much more receptive in buying COTS software and looking at something that others are using and thinking that actually we can gain a lot of benefits by sharing that development cost with other armed forces around the world. In the resilience space, There is a huge market out there in terms of risk and crisis and continuity management. It's also a much more heavily competed space, obviously. So we are seeing that alongside our straight off-the-shelf customers, we will also be working quite a lot with slightly more advanced customers when it comes to those with more integration requirements, those who have a more advanced requirement. And we will be using our foundation in our platform, which is tailorable and scalable, to be able to facilitate those customers alongside the standard off-the-shelf customers, which we are also working to attract now and to start building that foundation customer base in a much stronger way than we've done in the past. So that will align with our long-term strategic goal, and I think we will be seeing – based on the growth in COTS requirement from the defense space, as I mentioned, both in the U.S., Europe, and in APAC, alongside that combination of off-the-shelf software with slightly more customized solution in the resilience space, we're building a good foundation for the future. So quite excited about that change that we're seeing in the market, but also that change that we're now experiencing. optimizing into the organization to actually build a 4C strategy that is ready and able to deal with this new way of selling our software.

Thank you so much. So when you talk about optimizations, could you please give us some more insights about what that means going forward?

Yeah, no, for sure. And as I've mentioned in the past, right, we have been looking at the structure and the layout of how we internally organize 4C to... to get to where I was just talking about. How do we structure the organization? And as we've been talking about since both the Q1 and the Q2 report this year, what we've been doing is we've been looking to streamline our business. You see that in the outcome of our operational expenditures for Q3, and you'll see it going forward as well. We've created these new business units and these regional focus, which is APAC, EMEA, North America, and then our global reaching expert services focused here or headquartered here and focused predominantly in the Stockholm and the Nordic region. And we're starting to see the effects of this now, I would say. We see the synergies of having these regional teams working together across both defense and resilience. We see the effectiveness of doing that as well. And we're also starting to see that effect on a group level by being able to do some optimization when it comes to our overhead, when it comes to our supporting staff, and so on and so forth. Now, We are working continuously with this, and we will be working throughout the end of the year to set the structures when it comes to our tech development, when it comes to our supporting organizations, and how we continue to enhance and focus in on making an as operationally sound and lean operation as well, while at the same time structuring us for that future global expansion, which is one of the key strategic objectives for 4C Strategies. As you will have seen, we have the new segment reporting as part of this report came out this morning, whereby we are following this new structure. And I'm really happy about the progress that we're making. This is obviously something that takes time to get the full effect out of and so on. But we will be seeing more, I think, effect and efficiencies of this as we move forward. And I think we are now in a position where we have a 4C strategy, which is structured, in a good and positive way to be able to reach the objectives that we've set out and where we're going for the future.

Okay, great. Thank you for that summary of the business highlights. We will now move on to the executive summary and the Q3 figures.

Thank you, Jessica. Yes, we will. So looking into a little bit more detail then about around Q3, we'll take you through the different regions. But starting off on the overall level with an executive highlight and the summary here, You can see we had a net sales of 94 million SEC in Q3 with an EBIT margin of 17%. That's obviously a positive increase compared to the relative quarter last year. And it sets us up in a good way to end the year in a good way. We see, as I mentioned previously, and when you look at Q3, obviously the turnaround in North America with the strategic contract and also the COTS contract being signed is the key number one highlights. In addition to that, we are starting to see the effect of our streamlining operations with a lower OPEX, which helps on the EBIT margin. And all of that is being done whilst at the same time optimizing our product go-to-market strategy, which will hopefully continue to accelerate our net sales CAGR, which, as you can see as well on the slide here, is around 17% from the period 2020 to 2024 and Q3. So all in all, I would say that Q3 was the quarter that we were expecting it and hoping it to be when it comes to the turnaround in North America. And when we go into a little bit more detail and you look at the comparison, what you can see here is obviously that one of the key areas is the North America part of this column for the rolling 12 months on Q3 has increased. It is taking us back to closer where we should be and where we've been striving to be over the last couple of quarters. We are seeing a slow decrease in the EMEA component of this picture. That is due predominantly to seasonality, I would say. And it's something that we've been expecting, which is not a concern at this time. And we are seeing an increasing pillar when it comes to APAC as well. And I'll come back to APAC a little bit more detail in a minute. But all in all, a positive trend at the moment. And obviously, we're hoping to continue to push this forward. Going into the details around the different segments then. So looking at EMEA, so Q3 for EMEA is always a bit of a challenge because it's seasonally slow. There is a lot of holiday periods. There is a lot of sort of waiting and assessing of what's going on. And in addition to that, in one of our key markets in the United Kingdom, we also had an election coming in in the middle of this quarter, which in the UK always puts a bit of a hesitance into the market in terms of what are we doing, how are we spending defense budgets, and so on and so forth. So we were expecting it to be a slow quarter in EMEA. We did attend quite a lot of market outreach events and spoke to our customers, and we've been on both exercises, and we've been meeting with our customers at major events, and we know that there is a good interest and still a growing interest in our defense solutions. Secondly, it's interesting to see in all of Europe, as you will all be aware, you can see that defense budgets are going up, defense spending is going up, etc. So why isn't that necessarily affecting a company like 4C at this point in time? Well, predominantly because historically, or up until this point, what defense organizations and armed forces around Europe have been doing is replenishing equipment and ammunition and all the other things that initially was gifted to the Ukraine and is now also part of that national buildup. So what we're seeing is that it's slowly starting to shift from those tier one or tier two and the first and second wave and so on has also been mentioned as part of this in terms of replenishment and buildup towards force readiness. And we're starting to see that now shifting into also looking at training, looking at readiness buildup and how are we going to use all that equipment that we bought. And we are expecting an increased activity and an additional business coming in towards the end of the year. Shifting focus into our Australia and Asia-Pacific region, I think Q3 was very much focused on delivery of those previous contracts that we've signed earlier in the year. Those contracts put us in a very strong position where we now have strategic contracts both with the army, so the land forces, we have it with the air forces, but we also have it in the joint space delivering one of the largest exercises in the Asia-Pacific region together between the U.S. and Australia. And this gives us a very strong position when it comes to continuing to leverage the market in Australia and also expanding into the wider Pacific regions. So looking positive and a very strong, very small team still out in the APAC region. So more to follow in that region. Looking then towards North America. So as I mentioned a number of times already, significant turnaround with a major new operational contract. So what do we mean when we talk about operational contract? This is mentioned also in the in the report. So basically, it's important to remember that the key contract that was now signed was a continuation of a previously delivered project development contract. So we worked together with this customer through the prime contractor for a number of years in terms of developing the concept which has now gone into production. And that signed on initially on a three-year contract with an additional two-year option worth approximately the same value as the initial three years. Good increased profit margin on that contract going forward. And we've also, as I've mentioned, strengthened our position in defense as a standardized solution provider where we have seen a number both of initial contracts but also of customers who are now in the final stages of that procurement cycle to roll out our COTS solution within the defense space in the U.S. So different unit commands and different divisional commands looking at how do you track readiness and how do you build force generation with using the power of Exxon in terms of simplifying and making that process more streamlined. In the resilience space in North America, I would say we're still in the early stage expansion of that market share, and we are finding out and learning as we go in terms of how do we break into that market. We have a number of really exciting deals in the pipeline. It is a strongly competitive market. with a lot of providers out there, but it's also a vast market when it comes to market availability and market share. So more to follow on the resilience base in North America as well, and looking forward to tracking that over the coming quarter and years. Finally, then, ending with our expert services. As I mentioned previously, expert services predominantly based out of here in Stockholm, but with a global outreach with customers in Europe, in the UK, and also reaching in to support our efforts in North America and APAC. So for expert services during Q3, we had a steady revenue with an increasing requirement when it comes to preparedness and sort of the Swedish concept of total defense and increased readiness. So a lot of effort is being put in society in Sweden and in the Nordic region to increase our and how do we support for a heightened state of readiness? This is something that is now coming to affect both, obviously, government organizations that have been working with this for a while. You just heard earlier last week that the Civil Contingencies Agency in Sweden is now changing name at the end of this year or start of next year to the Civil Defense Agency, which is obviously shifting focus in government and in society in Sweden today. And this is something that 4C Strategies has been supporting with for the last almost 20 years and something that we are well positioned to help not only government organizations, but also all of those corporations and companies that are working in and around this space. So financial institutions, manufacturing institutions, all of these companies and corporations are now seeing that requirement coming from government in terms of how do you prepare your organization to act and to be more resilient in and to be more prepared in a situation around which Sweden and the Nordic countries as nations are working at a higher level of readiness. So a lot of interest in what we're doing, a lot of great projects being delivered, and we're seeing a positive outlook towards the sales pipeline for Q4 and expert services and taking us into 2025 as well. So all in all, Positive development in all or most of the regions. Some expected low points or slow points during the summer. But we're looking forward towards Q4 and the end of the year.

Great. Thank you. We will now take a step back and shift focus from this quarter to key priorities for the company going forward.

Yeah, no, absolutely. And just to round off, so this morning's presentation, before we go into the Q&A, I would like to just take us back a little bit. I've mentioned these three key priorities, both in the Q1 call, my first initial report this year, but also last quarter. So we are still very much focused on these three areas to continue to drive the organization to build a stronger 4C and to optimize what we're doing, not As I mentioned in the report as well, we're not downsizing our operations. We are optimizing our operations. We are saving where we can save by still delivering that enhanced value to our customer and doing that in a way that positions us in the right way for 2025 and also into the future. We're focusing in all of our organizations in terms of delivering exceptional customer service, and an exceptional customer value following the use of the software and tracking the effectiveness of our expert services all the way out to the end customer and the value that is delivered to the end user and to the organizations that we work with and help, and to continuously track that and to make sure that we are focusing in on the areas that the customer needs and that the market requires. And then in addition to that, We are working really hard with our continued technical innovation. You'll see that in the final comments of my CEO letter, and I think it's a really exciting time and opportunity for where we are as a company right now. So 4C have been working within the areas that we are selling our products for a really long time, almost over 20 years now, which gives us an advantage and an edge compared to a lot of our competitors. And if you look at the AI and ML, predominantly AI revolution, which is now ongoing, where technologies and new opportunities are being introduced almost on a daily basis, we see that through the positions that we have, being an established provider and being a provider that has a platform and that has technology which is already accredited and available for use within predominantly the defense space, where this is a major, major hurdle, we have what is almost a unique position within the training and readiness preparedness space in terms of making these technologies available to the defense organizations around Europe, NATO, the US, and our allied countries in terms of how can you utilize this technology, which is getting readily available as every day passes. So a lot of work and effort going into this, a lot of work and effort thinking about how do we What is the use case for this? How do you actually apply these technologies in a way that makes sense and that adds value and that isn't just a clever chat GPT that somebody types in a question with more or less for fun, right? So actually looking at all that available data within the defense space and all that available data within the training space and then also taking that and applying that into our resilience customers and into our resilience workflows where we will have users who can a year from now will see this as something that they will be expecting. You won't be able to deliver software products without having AI enhancement, without having predictive capabilities helping you to do your work and so on and so forth. So the combination of the work that we are doing with our long term strategic defense customers, the cutting edge work that you can do on Internet connected services with our resilience customer and merging those two, taking it offline and delivering it in the high security, high demand customers is an opportunity which is really, really exciting. And we'll be telling everybody more about that on the different trade shows that we'll be attending over the course of Q4 and then also as part of the coming calls into 2025. So working really hard in terms of making sure that we keep our strategic objective with these three key focus areas, optimizing the organization, making sure that we focus on our customers and making sure that we integrate these new and evolving technologies into our services offering. So really, really exciting times. And thank you for taking the time this morning to listen in. And over to Jessica.

Yes, I will let those words conclude this part of the session. Thank you for your attention and thank you for all the questions that we posted in the chat. I will now invite CFO Anders Nordgren to join the stage for the Q&A session.

Welcome, Anders. Thank you very much. And thank you, everyone, for listening and for the questions that you've sent in. So we will now go through a couple of different questions to round off the seminar here this morning. So I think the obviously and positively as well, a lot of interest around North America. So the first one we've got is the turnaround in the North American market. Could you elaborate on how this change will impact going forward? Well, I mean, as I've said, both in the previous quarters and in the report today, this morning, right? So North America is one of our key strategic segments going forward, and we are expecting expecting that to continue. And if you look at the defense market, it is a massive opportunity. So now we've seen what I think is an important turnaround. We've seen that we are able to contract both directly with the USDOD and other North American defense agencies and also through PRIMES, which is something that has taken quite a while to establish that ability to be able to contract directly with the end customer. So, I mean, now the there's a lot of hard work that continues. There's a lot of hard work that's going to go into pushing forward and further establishing that position. But I do believe that, you know, going where we're going and the interest that we see in the defense space, but also in the resilience space where we're currently in basically breaking into the market. Yes, of course, North America is going to be a key strategic part of our continued growth. And And we're looking forward to really working hard with the team over here, supporting the team in North America and to build on the interest that is there at the moment. So big trade show coming up in Florida in December. We had one in Washington just two weeks ago where we continue to see that as an effect of, Having made these steps forward, we can see that, you know, that sort of solidifies the offering and gives a better segue into continued contracting. So hopefully we are going to progress in a positive way. And to continue to to move forward with our North American market. Now, I think we have some kind of camera. I think we're back. That's good. Right. I will jump to a question for Anders. So we'll start off with a question around cash. So what is your view on cash development and the negative trend that we've been seeing?

Yes. Thank you for the question. It is a trend that has been negative, but it also is a trend that we now believe has stabilized and where I or we anticipate improvements moving forward. And this is something that is supported by a combination of factors, I would say, where the turnaround in North America is obviously a main contributor to that. Another thing is the conversion of contract assets in coming quarters. We have a fairly good visibility of when that will happen, and that will have a positive impact on the cash development in the coming quarters. Those together with a more lean cost base, will be keys to the positive output for our cash position in coming quarters.

Yeah. So, yeah. So still a lot of hard work to do. We're monitoring the situation, obviously, very closely. But seeing a positive change in the trend, which is good. Okay. I think we'll stay with you, Anders. So another one. OPEX came in at a lower level this quarter. What are the main reasons for this, and should we expect the same going forward?

So, yeah. Yeah, so first, I'm pleased with the level of OPEX now coming in in Q3. Of course, it reflects the optimizations we've implemented and will continue with. Looking into the future or looking ahead, I expect – OPEX to increase slightly from Q3 levels, primarily due to the seasonal impact from the summer holidays that we have here in Sweden. I don't expect or anticipate seeing the same levels as we saw in Q1 and Q2 this year. So I still expect it to remain on a stable level. Slight increase from Q3, but not as Q1 and Q2.

Yeah, no, I think we've found optimizations, and we are obviously looking at that continuously as going forward as well in terms of how are we able to deliver our products to our customers in the best possible way. We've got a question here as well around subscription-based payment models. Do you have any plans to implement more subscription-based payment models? Well, yes. I mean, basically our COTS – arrangement with most of our customers today, I would say, is in a way a subscription-based payment model where customers pay either annually or more so up front. I think we're going to see more of that as we move more towards a COTS, more standardized product offering, especially in the resilience space where we are. As I've said as well earlier today, we've worked a lot on packaging those solutions so that basically it's not going to be a, you're not going to buy it with a credit card on our webpage, but it is a process of simplifying the process significantly in terms of buying a risk tool or a crisis management tool in a very pre-configured package solution, and that is then going to be a year-on-year subscription. And that is going to be the foundation for our resilience offering alongside the slightly more complex customized customers. So, yes, we are We're transitioning towards that. That's part of the medium long-term plan. And obviously there are a lot of benefits from having that long-term subscription customer base. Right. So following then, probably we'll end off on a final question here. Following this Q3 quarter, could you outline your plans to sustain momentum towards the end of the year in Q4? Well, I mean, We're positive about Q3 and the way it progressed. I think that's been mentioned, right? So in many ways, we've seen a turning point, not necessarily in all the markets yet, but there is a lot of hard work now going into Q4. There's a lot of effort around the world to make sure that we secure the deals that we have in pipeline and that we push really hard to end the year in an as positive way as possible. And there's a lot of work and effort going into that. So I think we have a positive momentum in the organization and we'll work really hard to continue to push that. Right, so we can see a couple of last minute questions come in here. Can you talk about the number of COTS contracts signed in North American defense? Well, during Q3, in addition to the main contract that we signed, we signed our first COTS contract. We have since progressed with an additional number of contracts, which we'll tell you more about as this goes forward. So there is a positive movement there. Exactly how many they are and with whom, we are not really in a position to divulge right now, but we'll hopefully be sharing more information over the coming months. So, yeah, I mean, obviously, in this space, it's a bit sensitive about what you can say, when you can say it, and how you can say it. But we'll be trying our very best to share as much information as we possibly can about these contracts going forward. How sensitive are you to future public budget delays in the U.S.? Well, I mean, of course, we are sensitive now. to if there would be a full stop in the U.S. again. What is positive is that there's never going to be not a budget in towards defense spending in the U.S. When the limitations come in, they come in towards new spending. What they do is they pass what's called continuing resolutions, which means that they can maintain spending. And what we've established over the last six months is roots in towards these these individual commands where you can use discretionary spending, which aren't necessarily impacted in the same way by the federal budget. So, obviously, the U.S. election on Tuesday next week is going to be very interesting for a lot of people. And we will be tracking it just as closely as everybody else, I imagine. We did see that the U.K. budget yesterday announced another increase in defense spending, which is obviously positive towards what we are working with them on. So, yeah, there is obviously always impacts from the elections around the world. But we'll wait and see and see how it goes and work really hard to progress the deals and the opportunities that we have in pipeline and to support the U.S. team in making this and taking this across the line. So. Yeah, lots of hard work in the next couple of months. But in a positive way, I think the organization is with us. And I'm looking forward to continue to share success stories in the future. So thank you, everyone, very much for listening. I think we'll end it here. Thank you, Anders. Thank you, Jessica. And happy Halloween, everyone, and have a good day. Thank you.