4C Group AB (publ)

Good morning, everyone, and welcome to this third earnings call for 2025 4C strategies. I'm Jonas Johnson. I'm the CEO and I'm joined here today by Veronica Wallin, our CFO.

Good morning, everyone.

And we're going to guide you through to today's presentation. And I'd also like to say that the Q&A section is now open. So please, if you have any questions, write them in the chat as we move through the presentation and we'll come back to those at the back end of of today's call. We're going to take you through a little bit of a key update from the start and then into the high level numbers overview. I'm then going to guide you through our segments around the world with a bit of an update of what's been going on during the third quarter. And then Veronica is going to do a bit more of a deep dive into the numbers. And after that, I will be coming back in a bit more detail as well to the strategic update that we've announced this morning as well. So if we start by looking back at what was a slightly slower third quarter than we were perhaps expecting, especially on the North American side. We did have solid progress, I would say, across the world. We did make a couple of core deliverables, especially within the NATO realm. You can see that small picture there on the left-hand side is from a delivery of a project called Talos, which is really important for us, and I'll come back to it a little bit more in the EMEA update. But we've made good progress in core markets. We've also made good progress in our expert services here in Sweden. And we maintained, I would say, a strong momentum in the defense and training segment. We have seen a continued slow uptake on the resilience side. And based on that, as I mentioned, for those of you who have had time to read the report this morning, we have made a strategic decision to realign our position going forward. in terms of being able to more focused drive profitability and scalability for forces strategies as we continue to progress in the current macro environment so I'll come back to more details on that as well a little bit later on the call because I want to give I want to give you as much detail and understanding about where we are where we're going and how we came to this conclusion as well so I'll come back to that but if we look at the numbers in brief We can see that Q3 2025, we delivered 72.7 million SEC top line with a negative result of 16%. Now that is significant to less than the comparative quarter last year, which was in a way also a little bit impacted by a few large deals that were signed in that quarter. But as I mentioned, it was a softer quarter than we were expecting, mainly impacted then by not being able to achieve as much deals as we were expecting during the third quarter in the North American segment. We know that when it comes to expert services and EMEA, the third quarter is always a bit slower due to the seasonality and the holiday period. But we were expecting to get more out of North America than we actually were able to achieve. On the positive side, we can see that if you look at the last 12 months of sales, we're still above 350 million and we have increased our ARR up to 270 million due to a number of new COTS deals that came in in the quarter. So I would say all in all a bit of a mixed bag when it comes to the third quarter, not what we were expecting, not what we were pushing for, but at the same time, A lot of positive activities has been taking place which position as well towards the future and there is a lot more to come as we move forward towards the end of the year and into next year. Looking a little bit more in depth than at the different segments. So we're going to take you through EMEA, APAC, North America, and then end with expert services. So here in Europe and our EMEA segment, which also covers our NATO customers and our global customers of that aspect, We have had, as I mentioned, the lower activity due to the seasonality. So here in the Nordic region, but also in Europe, July and August are significantly slower when it comes to making new deals with government officials and customers. But we did maintain good activity. Despite that, I would say we have delivered a couple of core projects within NATO where the first one first delivery of the Talos project has put our external product in a position that NATO themselves described as the new standard for delivering testing and evaluation and trials and experimentation within NATO. And we are then obviously expecting that to spill out into the NATO countries and allies as well. But in addition to that, we also, as part of that, secured a continuation and expansion of that specific contract for approximately 15 million SEC, which will be delivered by the end of 2025 and into 26. And we've also delivered additional trials and tests together with three additional European NATO countries, which we are then working hard now in terms of progressing those into the next phase towards the end of the year. So really promising progress there and I think it's important to mention as well that we are seeing, especially now in Europe, the fact that this change, which there's been a lot of money pumped into the system, but a lot of that money has gone to purchasing of new material and new weapon systems and so on. We are seeing now that that is starting to convert into also producing capabilities. So that comes with training, that comes with readiness assessment, and that comes with the continued question of what are we getting from all those investments? The increase in the services and the software that we deliver is continuously high and it's growing all the time, I would say. But it is also processes that take a long time and therefore continues to impact the quarterly volatility a little bit. If you look at APAC, comparatively to last year, slightly lower quarter, but still strong. We achieved the key contract that we were targeting. for the third quarter uh where we renewed and expanded with one of our key strategic defense customers in the region we've also broadened our work within the where we sell our defense product within the uh within the public sector so we've delivered our initial projects together with the uh with the counter-terrorism centers in both in australia new zealand And we've also expanded our work with other government customers such as the Australian Maritime Safety Authority, which is going into a very exciting exercise next year that we will be part of delivering. So I would say a good quarter as expected in APAC slightly lower than last year. But it is an exciting and interesting market that is that is growing at the rate that we were hoping for. And they are both cash and revenue positive and being on the other side of the world. That's obviously an area that we're quite keen on to continue that expansion. If we shift focus then into North America, as I mentioned, a slower quarter than we were expecting. There's quite a lot of turmoil in the US at the moment with everybody knows that the currently as of Today, the government is still in shutdown with no new budget approved. I think this impacted a little bit also back in Q3 that there were concerns about how things were going. We have delivered new contracts. We are continuing to expand our COT space with key defence customers selling directly to our end users. And I think that that strategy still holds. We are expecting a more normal way of working once the government comes out of this shutdown and either a continuing resolution or a budget is approved. And the comments that we're hearing from the customers as well is that once we get through this, then the defense budget will be in a much better position and the defense and those who are who are able to spend that defence budget will be in a better position to be able to commit to things as well. We can clearly see that our offering is very much aligned with the new direction that comes from the newly established Department of War and and the government administration, which is to buy ready now and COTS software to be able to deliver effect quickly. So I'm looking forward to a more stable situation in the US. And I think that our position that we've strategically gone into is the right one. And I think we're making progress towards that. So I think we'll be stronger out of Q4 and into next year as well. Finally, on the expert services side of the house, very important part of 4C strategies and one that is growing well as well. It was a little bit hampered during Q3 due to the fact that we are a bit challenged when it comes to growing our team, our pool of resources, our delivery consultants. This is in part impacted by a stronger interest in the market, which is which is a bit of a catch 22. So our customers are recruiting the same competencies that we are recruiting, but at the same time, they're trying to buy additional competence. So from we see a very strong position going forward, our order book is strong, and we've signed A number of new projects during Q3 as well of quite significant nature going into next year where we are helping sector-wide exercises and sector-wide government agencies to deliver more of a total defense capability across Sweden, really. This is followed by an uptake in the UK as well, but in general for expert services, the Swedish market and the Nordic market is our core market and it's something that's going to continue to grow as well. So I'll stop there with the sort of segment overview, and I'm going to hand over to Veronica to take you through a little bit more of the numbers.

Thank you, Jonas. The chart on the left side illustrates the net sales by segments together with the adjusted EBIT margin over the last 12 months. We can see that revenue growth has decelerated during the third quarter, with the latest 12 months sales increasing by 4% year over year, reaching approximately 352 million. Defense continues to drive the majority of our business, now accounting to 77% of total sales, up from 72% a year ago. Global Expert Services and EMEA remain stable, while North American APAC saw a softer activity due to delayed customer decisions and timing effects. Last year's results were also boosted by large individual contracts affecting the competition. The adjusted EBIT margin shown by the green line was 3% for the period, up from negative 5% last year, the latest 12 months. That reflects ongoing cost efficiencies and stronger project execution. Here we can see the contract assets in orange, and it has continued to rise through 2025. This reflects strong product activity, but also delays in converting assets to cash. And that is mainly due to slower customer decisions in the US. We can also see that cash remained stable while higher working capital from major defense projects and ongoing deliveries led to an increase in net debt. We continue to expect a gradual conversation of contracts into cash as products advance supporting a stronger cash position the upcoming months.

Yeah, and I think to add to that, as Veronica mentioned, and as I said initially as well, we did see a slower conversion of contract assets in the U.S. and our North American business over the third quarter than we were expecting. And we are still a bit challenged there, obviously, with the current U.S. government shutdown, etc. But we are working. We are looking forward to an increase in this over the next three to six months. And we still assess all of these contract assets as very secure and strong contract assets. So we are working hard throughout the company to improve our cash conversion and also looking at this very actively when it comes to new contracts and contracts coming in, in terms of how do we ensure that we position ourselves in the best possible way to move forward to improve this position.

Yes, here order intake is shown on the left side, and it has continued to strengthen year over year. It has increased from 331 million to 510 million on a 12-month basis. However, intake for the quarter came in slightly below expectations, and that is mainly due to delayed customer decisions. Even so, the order book remains strong at 281 million, providing solid visibility for the coming quarters.

Yeah, this is driven by our key core defense projects around the world. So both here in EMEA, also in the US, but also in our expert services, we've got a strong order book and a continued positive order. order intake if we look at the horizon so looking in a very positive way and we've got a number of key deals in the next three to six months I would say coming towards this you can also see quite clearly in the in the graph on the left hand side the fluctuations between the quarters so when we sign some of these big long-term deals as we did earlier this year in the back end of last year obviously that has quite a significant impact on order intake And we're actively working to convert larger scope deals as well coming towards the end of this year.

Yes. Here, if you look at the chart on the left side, the ARR has continued to grow steadily, and it has reached 207 million in the third quarter, up from 181 million in the previous two quarters. The increase was mainly driven by the defense segment, which now represents 77% of the total ARR. We can also see that this reflects the solid progress across ongoing contracts and renewals, providing a strong recurring revenue base and good momentum going forward.

Yeah, no, thank you for that. And again. This is part of what I said earlier. We were a little bit softer than we were expecting when it comes to converting new contracts. But our current contracts are continuing to grow. And we've seen that expansion in the COTS market in the US as well with new customers coming in. And I think that's going to be a key core market going forward as well. But it's been a little bit more turbulent maybe than we were expecting over the past, I would probably say, six months now. And we are very much looking forward to a stabilizing situation in the U.S. economy and the U.S. government. So we look forward to continuously increasing this and to deliver on our conversion of contract assets and also to grow quite rapidly within the defense space towards the future. So with that done, thank you, Veronica. Looking into the strategic update, for those of you who have seen this morning's report, you will see that we have decided, we have been continuously assessing for a long time, and we have now made a decision for a strategic change when it comes to our product offering. So if we look at the resilience product domain, which we have been actively pursuing for a long time now, We have a number of really great customers that we've been working with and we have gone through a significant effort, I would say, over the last couple of years when it comes to packaging this, when it comes to market outreach, when it comes to growing our effort really to try and advance our position with the resilience domain from Sweden through the UK and Europe into APAC and most recently also into North America. What we can see, though, is despite all these efforts that we've been putting in and the level of investment that we've done, is that it's not yielding the result that is required. And we're not seeing the uptake happening at the speed then that I was expecting and that we as a company were hoping for. And this, I believe, is due to a number of different reasons. But we can see that there is a number of different competitors in the market. It's quite a tough market. And a lot of those have been in basically a race to the bottom when it comes to pricing to grow their customer base. We have seen a high interest in this space when it comes to continuity, risk management, incident management. But that high interest has unfortunately been coupled with quite a low willingness to invest and actually also invest in software to support effort when it comes to this. We see the same things being strong in expert services, but we've been struggling to convert our resilience product domain. So in the light of that, we have decided to move forward with a reduced scope. We're going to streamline our operations. That comes with both the staff reduction and other external costs. All in all totaling this will be a reduced OPEX by approximately 40 million in annual savings. as you can clearly figure out that comes with quite a significant staff reduction as well. We're not expecting this to impact on current resilience revenue as it sits right now and going out of the year and we are expecting to be able to continue to deliver on all our promises and all our contracts towards our existing customers and also to be able to manage inbound sales as they come in and as we get them through our expert services initiative as well. So we are moving forward with a reduced effort, primarily when it comes to sales and marketing towards this domain, but also reducing efforts when it comes to the future product development. So we will stabilize the product that we have further and then continue to deliver on our existing contractual obligations. We will also be reallocating some staff towards our defense expert services and training products. All in all, obviously, Forces Strategies is a small, medium sized company. So from a company perspective and a personnel perspective, this is a big thing. This is a big change. A lot of people will be impacted and we will We will obviously work actively to support all of those in the best possible way to move forward as quickly as possible. From a strategic perspective, from my perspective and the board's perspective, we are in we are in active agreement that this is the right way forward we're going to make significant cost reductions which will allow us to to look at investments in the future but also it will allow us to become much more focused in terms of really making sure that we are targeting the market as we see it right now which sits inside these defense projects delivering our defence product to our core customers, delivering a growing expert services within the total defence domain and the additional markets that they are servicing, but also looking at how do we ensure that we can provide our defence products, i.e. training, readiness management, capability development, making sure that you're prepared through exercising and testing your capabilities to customers that sits in the near realm of these defense customers. So we will be actively working with governments. We will be actively working with agencies and corporations who are looking to improve their business. And I believe that based on where we come from, the pedigree that we have as 4C strategies and the products that we have which are tested within the defence domain to a really high quality and we see that there is a continued increased interest in this space, also in the non-defense realm, I believe we'll come out of this stronger and we will be in a much better position to actively pursue the core markets as we see them grow. So a big change for 4C Strategies today announced and I'm looking forward to seeing how we can progress this with a tighter organization, a reduced OPEX to start with, and then really focusing in the whole team on making sure that we can deliver value where we see the best possible potential outcome as we move forward. So a big change for us, but really the right decision to make as of today, I think. And as with that, we will move into a Q&A section. So we will start taking questions from the audience. Thank you very much. All right, thank you for all the different questions. We will start covering some of them. So the first one is, what's the expected revenue impact from scaling down on the resilience business? So it's a bit tricky. So obviously, from a longer term perspective, we are expecting we're looking at a reduced growth ambition. So from from our strategic objective that we've had over the past years, we were expecting an uptake in the resilience domain, which we haven't seen that materialize. We're not necessarily expecting that this change will impact on our current recurring revenue that we have within the resilience space. We're also expecting to continue to grow that a little bit as we move forward. So we are expecting to be able to retain the level that we've been at, hopefully with a bit of increase over the years, because we still see that there is an interest in the market. So we will predominantly be looking at reductions in the sales effort and the outreach effort and in some of our sort of marketing and trade show initiatives and so on. So the plan is that we will retain our current customer base and continue to work with those and that we will also continue to grow and deliver a really good service to those customers. So hopefully that's going to continue to grow a little bit. So let's look at the next question then. How will budget delays and uncertainties under the current US administration affect Q4 in 2026? Well, I mean, Obviously, a difficult question. As I alluded to in the presentation, there are uncertainties. We've seen bigger uncertainties, I would say, during 2025 than we were expecting going into this year. But at the same time, I believe, and from what we get from our advisors and our US board of directors and so on, that once we're through this situation, we will be seeing a much more stable position moving forward. So I do believe it will have some impact during Q4. But I also think that coming into 2026, as I mentioned as well, we know that our offering is very well aligned with uh with the ambition and the intent on the market so buy now uh ready now and buy cots and don't go into these large long projects which they've done in the past to to develop their own software etc so i think we'll be seeing an uptake in the us market um But I also think it might take the current uncertainty with the government that is in shutdown is obviously something that is impacting us from multiple different perspectives. But once that situation is resolved, then we'll come out of this stronger on the other side and hopefully be able to convert both new deals and current contract assets in a quicker manner. right let's see here we have a question i think i'll hand this one uh on to uh yeah let's let's see here Yeah, so another question on the risk of conversion of contract assets due to the US government shutdown. Thank you, Victor. Well, I don't necessarily see a risk with the actual conversion of contract assets. It's more of a timing question. So some of our development projects which are ongoing, our deliveries, those are slowing down a little bit, but the majority of them are continuing at pace. We don't see a risk in the conversion of the assets, but rather a potential bit of a slowdown, which we've also seen so far. But I don't see a risk with anything that we have in the order book or anything that we have assessed so far. So we're working with our customers to continue to deliver. And we're pushing hard to be able to do that and expecting that to continue. So another question. So Veronica, I'll give this one to you. What is the question for the restructuring program and when will that cost be taken?

Yes, so the cost will be approximately eight to nine million and we will take most of it in Q4 and then in Q1 2026.

so we've got a question around I think we've answered that one we've answered this one as well The government is in shutdown, but is the Defense Department also in shutdown? A question here. Well, in part it is and in part it's not. So the Department of War is obviously in a way excluded from the government shutdown. But at the same time, they are very heavily reliant on civilian employees as well who in part are impacted and also the fact that there is no current operating budget means that there is a very it's a very challenging situation to get new commitments and to be able to progress on certain deals so there is a building backlog of things that needs to be pushed through the government administration and It is a challenging situation. On the other hand, we are expecting a positive situation coming out of the other side. And the mood music is that it's not necessarily the defense allocations or the defense budgets that is being contested. It is other part of the US government House and Senate are not in agreement. So it's a tricky, difficult situation, but obviously we are working both with our end customers, but we're also working quite actively now with other prime contractors in the US, the large defense primes, et cetera, to see what we can do in the meantime and how we can both position ourselves, but also potentially get in on other programs which are also currently active. Working hard on that situation. And I should also reemphasize that whilst this is happening in the US, the European defense market is obviously progressing really well. And that goes to another question here. We've got a question about potential large scale deals that we're currently working with. Well, I won't go into too much of a detail about where we are, but I mean, as I mentioned in the report and in the presentation, we're currently we've conducted additional tests with additional with three additional European NATO countries. We are quite far progressed in those discussions and we've had very positive outcome of those tests. we can see that the interest from the continental European countries is something that has increased significantly during this year and we're working actively to be able to materialize those deals in the near future. So hoping to add new flags to the map within the near future and the size of those deals will range depending on on where they start and if it's going for a single training establishment, a part of the armed forces or an enterprise-wide contract. So, a number of different opportunities that are progressing. We also have a question here then. Does the current financing cover your investment and working capital needs through 2026? I'll give that to Veronica.

Yes, our assessment is still that the current financing is efficient to cover the investments and the working capital needs for 2026. But as we have communicated before, of course, we will continue to monitor the developments closely and we will maintain an active and constructive dialogue with our banks and so on. It is also worth noticing that the fourth quarter is typically strong in Europe, as we have mentioned before, and that will also have a positive impact on the cash flow.

And that is, I mean, the fourth quarter is strong both from a deal conversion perspective, but it's also strong from a contract conversion perspective, which we know from our historic contracts. So we will have a positive uptake on that side. The 40 mil SEC annual saving, will that go directly bottom line and when will that kick in? Well, I'll start and then you can add to that. So obviously we're working to implement these savings as quickly as possible, but also as I'm sure most on the call are aware, a large portion of our staff is located in Sweden, which comes with a number of different sort of restrictions and complications when it comes to doing restructuring. We believe that we will have the full effect of this sometime towards the end of Q1, I think. And then, yeah, that will go towards the bottom line.

Yeah, most of it will go to the bottom line. I would say maybe 75-80% and the rest of it will go against CapEx.

So yeah, an impact on positive impact on cash. Obviously it takes a little bit of time to do this conversion. And I think it's, I mean, this is a strategic change for the company where we will be really focusing in on making sure that we can that we can utilize the trends that we see in the market. We see a really strong growing potential within our defense offering. We see that we really need to focus in on that and to deliver towards those customers and make sure that we're in the best possible position, both when it comes to how we invest, but also when it comes to where do we focus our efforts and where do we focus our staff in a way that we can we can capitalize as much as possible on this because as I mentioned briefly, we haven't seen the full effect of the rearmament process which is going on in Europe yet. There has been a big surge in buying materials and we can see those announcements weekly. But it now comes time when we need to start when when the armed forces needs to start and we need to support them to start to convert this into capabilities and be ready to actually work with with what we've got and how to rebuild that. And also being able to ask the question, where did all those investments go? So I believe that there is a is a surge in terms of the the capabilities that we're delivering. We hear this in the conversations that we have with our customers and potential customers as well. And I do think that both in the US, but especially in Europe and to a degree in the Asia-Pacific region as well, there is gonna be an increase in defense sales over the next, well, for a really long time. And I don't necessarily think that that will be impacted either way by the by the geopolitical changes that we all hope are going to come in in ukraine and so on um right we have one question here about recruitment of developers well i mean it's it's a bit of And the question is, can you comment on the recruiting of senior developers in Australia and what their roles will be? Are they needed for local adaptions? And will this be the model for different regions as well? In a way, they are sometimes needed for local adaptions. In this case, it's about the fact that we have a strong growing customer base who has some requirements for local security cleared personnel. As you're aware, we've got staff now in the US, in the UK, in Sweden, and in Australia. Will we need to continuously grow this? I'm not sure. We will if the market is there to carry it and we get investments from our customers who will go towards investing in these areas. I think it's a good opportunity to have our development teams, our engineering teams as close as I think in this case, we've seen that we've got a very good effect from this team working very closely with the end customers out in Australia. I don't necessarily see that we will need to recruit developers to meet the requirement from our new customers in Europe. I believe that we will be able to deal with that from the UK and from Sweden as well. So it's a little bit of a mixed bag depending on where you are in the world, but all in all, I'm very happy with this team growing. And as I mentioned, they're both cash and revenue positive. So we'll hopefully be able to announce more positive news from Australia during the next couple of months. And I think with that, we will end today's call. And I would just like to take the opportunity again to say, Thank you for everyone who's joined. Thank you for your continued support for Systrategies. As I mentioned initially, not necessarily the final Q3 numbers that we were hoping for. We have seen some delays, but on the other hand, we're now pushing hard into Q4. I hope to be able to make some announcements in the near future and really utilizing the situation that we have towards the end of the year here. We'll be pushing hard into Q4, really making sure that we deliver on these European contracts and hope to be able to share more positive news with all of you in the near future. So thank you very much for your attention this morning and have a good rest of the day.