4C Group AB (publ)

Good morning and welcome to the first quarterly earnings call for 4C Strategies for 2026. My name is Jonas Jonsson and I'm joined here by Veronica Wallin, our CFO, and we're going to guide you through this morning's presentation. We will do as we have done for the past couple of quarters with a short introduction for myself, high level overview and then going through our segments. We will then do a little bit more of a deep dive into the financial numbers where Veronica will present and then. Ending with a little bit of a future outlook and some Q&A. We are opening the digital floor for questions now, which we will then address at the back end of the presentation. So a brief introduction to the Q1 numbers. As you will have seen, obviously, the first quarter of the year didn't necessarily pan out on the level that we were aiming for. We did have a strong order intake, particularly in the defense segment, which I think exemplifies and underlines the the underlying fundaments of our business model and what we're trying to do. But all in all, obviously, the top line numbers and the net result didn't meet our expectations. I would say that the first quarter has been sort of characterized by continuous turbulence in the market. There is a lot of interest, but there is also a lot of things going on for all our customers around the world. which short term impacts our ability to close out deals and also convert on contract assets. We have also continued the transition work during Q1 in terms of refocusing the organization more towards a Defense first approach, and we have done a lot of work when it comes to actually finalizing the strategic transition, which we initiated of the third quarter last year. So we are looking to see those effects starting in full now from the second quarter of the year, and we will come back to that in more details as well. And then if we look at the actual numbers, so foresee in brief for the first quarter, as I mentioned, we did just over 60 million SEC in net sales and a negative result of 20.4 million. As I mentioned, of course, this is not on the point where we are aiming for per quarter now. I think the only upside if we really look at the quarter is that the deals that were not that didn't come in, they were phased into the future. So we haven't lost any significant pipeline deals that we were working on. And then on the other hand, as well, we have seen a significantly lower OPEX. and cost base for the quarter. So on the one hand, that's positive. Obviously, on the other hand, we've now gone through the process of making those reductions. So we now need to look to the future and really focus in on converting those deals as we move forward. But all in all, 60.1 top line and a negative result. 20.4 is obviously not at the point that we're aiming for. Going in then to a little bit more detail around these different areas. So when we look at our defense base, which makes up a majority of our business and a portion that is growing, we had a strong order intake of just over 90 million SAC. uh which came out of contracts in our prioritized markets um we did see a revenue decline compared to the previous or the comparative quarter last year that quarter was also heavily influenced by some major deals but even despite that we had a weaker quarter than expected for q1 We did sign new US contracts, so two major contracts in the US totaling over 40 million SAC in order intake, and also a strategically very important deal with our Canadian Armed Forces, where we signed a new five year extension to deliver and expand that contract even further. That has since also provided additional opportunities for growth, which is part of the business model of land and expand that we are aiming for when we break into these new markets and then continue to grow them. Obviously, the US, Canada, continuing to forward our positions in Europe, all of those very much aligned with our ambition to promote our business within the NATO countries. And that comes as we are continuing to see a continued increase in interest. We have after the end of the quarter, we've initiated or we've delivered on a number of different trade shows. where we do see a significantly higher interest in the training space than we have done before. But as I mentioned, it takes time for these processes to follow through all the way through the cycle into actually delivering and purchasing services and software within our area as well. Moving on into our resilience space, as I mentioned, we have now concluded the transition and that strategic shift, which we initiated at the end of Q3. We are working very closely with our existing customer base, and I'll go into a little bit more detail about what that means in just a second. But really with the focus to maintain a strict cost control around this area, but also to continue to deliver value to our customers and then to As we progress, we will slowly be looking towards growth here as well, aiming for a cash positive resilience in 2026 and a revenue positive going into 2027. But I thought I'd take the opportunity to give you a little bit more of a sort of a flavor of what it means when we're talking about resilience and what it is that we're actually doing. Something which is relevant from a Q1 perspective, from two different perspectives into the same customer. So first off, with one of our key core customers, the EEAS, which is the European Union External Action Services, the foreign office of the EU, if you will, a long-term 4C customer. which we have expanded our contract with during the first quarter of the year, which is obviously key important for us in this segment. We did so with a over 20% increase in terms of the annual recurring revenue from that customer as per the new contract, so really positive. But also, more importantly, in a way as well, is that what we are actually delivering to this customer. And I thought I'd mention that just to give a little bit more of an idea. So everybody noticed and know about the still ongoing situation in Iran. what i think maybe took a little bit of people or some people by surprise was the impact that this situation had on the neighboring countries places like the uae oman and other areas where people normally go for holiday and a lot of people needed to be evacuated so the the services and the software that 4c delivers into the eas is to coordinate those efforts and we worked very closely with our customer during the initial period of this of this ongoing situation to make sure that all EU citizens could be repatriated and evacuated in an as effective and efficient way as possible by pooling resources, by pulling all of that information together into one shared operational picture, and then making sure that we could get people back to Europe as safely and as quickly as possible. So just as a snapshot of what it is that we actually deliver within the resilience domain, but also from a positive perspective that we have continued to grow this customer engagement from a contractual and revenue perspective as well during Q1. Finally, then, on the segments piece, when we look at our expert services area, a growing business area for 4C and strategically important, we are looking to a significant growth level during 2026. Seasonally, the first quarter is always soft, and as was the case this year. We did have a strong order intake and we have a good order book, which we carried in from last year, where we ended the year with a lot of sales in Q4. And so for all in all, I think the areas where we are with expert services right now is proving itself during 2026. And we are looking forward to a continued strong development during the year. But at the moment, The services that we provide are very sought after and also we're seeing a significant increase when it comes to our ability to increase our average charge rates, which is obviously key critical when it comes to delivering a profitable services business. So all in all, there were phased deals across our range of businesses and we're looking forward towards continuing the hard work during 2026 to make sure that we regain ground during the coming quarters and position ourselves both for the end of this year, but also towards into next year. I will stop there on the sort of the detailed run through of the segments and hand over to Veronica for a little bit more on the financials and the KPIs.

Thank you, Jonas. So let's go through the net sales first. And as Jonas mentioned, net sales in Q1 amounted to approximately 60 million. And that was compared to 91 million last year. This was kind of in a transition quarter and the lower revenue is mainly due to timing effects. The comparison is also affected by a very strong Q1 last year, which included a larger software deal and by the fact that several contracts expected this quarter have been postponed due to external factors that extended timelines during Q1. On top of that, we have also updated our revenue recognition principles to better reflect how customers buy today. That had also had a little negative impact in the quarter. At the same time, the reorganization has been implemented as Jonas also mentioned, and that has been according to plan. We have not yet seen the full effect in the quarter, as the lower cost base only started to materialize towards the end of Q1. But this will become more visible in Q2 and we will also see the effects then. The numbers of employees has been reduced by around 35 people compared to the pre-reorganization levels last year. Overall, while the quarter was softer, the underlying fundamentals remain intact and we expect improved efficiency and profitability going forward.

Yeah, and I think maybe just to mention a little bit additionally from my perspective on the revenue recognition, obviously this is a discussion that's been had with a lot of people in the investor community and in terms of explaining our REVREC principles and how that impacts contract assets and so on. And what we've seen during the recent 18 months of global turbulence is some of the delays additionally on the conversion of those contract assets. But what we are working now, and we've been working closely with our auditors as well, in terms of being able to see how we can better align Within the rules and regulations which quite strictly regulate this how you can then look at you know what parts of software is actually how much can we take over time compared to a large chunk up front and that obviously has an impact on the. on the short term top line revenue recognition. But from a longer term perspective, it will suit us better and we'll simplify things in regards to that. So that should be positive.

Yes, if we then go forward and go through the financial position and the contracts assets, we ended the quarter with approximately 7.3 million available. During the quarter, we have also secured new financing with the Swedish Export Credit Agency, which strengthened our position and gives us a better visibility going forward. Improving cash conversion is still a key focus for us alongside with the rest of the transformation. Contract assets has increased to 285 million with a net increase of 12 million after currency and tax effects. During the quarter, we have invoiced approximately 61 million from the opening balance and then added approximately 60 million in new contract assets. And that shows both growth and also ongoing cash conversion. So overall, we are both growing our contract base and making progress with the cash conversion from Q1 2026. We have also, as mentioned on the previous slide, updated the revenue recognition and you will, on this slide further on, see the change during the next quarters. And that will also, over time, create a more clearer alignment between the reported revenue and cash. If we go forward and go through the order intake and order book, the order book amounted to or the intake amounted to 91 million during Q1, which we see as a solid level, although lower than the strong Q1 last year, which was supported by a few larger deals impacting the comparability. More importantly, the order book continues to build and reach the new high of 364 million, almost up 10% compared to Q4. So despite some quarterly volatility in order intake, we are steadily strengthening our backlog, which provides good visibility and also a solid foundation for future revenues.

Yeah, no, I agree. And I think the I mean, if you look at the order intake here, it's quite clearly you can see the quarterly volatility. And yes, q1 last year was a was a really strong quarter, as Veronica mentioned, primarily due on. But if you then look at q1 previous years, and also some of the other courses, you can see that it goes up and down and And we are, I would say, in a good position towards the future when it comes to how the pipeline is looking at the moment. Now, it is hard to foresee exactly when we are converting contracts, how long it takes and so on, especially given the current volatility that we see around the world as well. Not only in our quarterly results, but also also with our customers. So thanks, Veronica. I think if we look forward, then. about where we're going and what is the focus for us as we now, well, we're already into Q2. We've seen some really promising developments. We are really continuing our focus when it comes to deliver on deal conversion and the larger programs that are in pipeline. So the second quarter and also into the remainder of the year have some really exciting opportunities. We've been working with a number of new customers on trials over the last year, year and a half. And those are now in the final stages of progression into more longer term commitments. And as I mentioned, there is also an opportunity when it comes to land and expand within these new markets. uh we had uh deliver on order book and convert contract assets as a continued focus last quarter as well that that obviously remains but what we're seeing now is that when it comes to our continuous deployment of our software and the abilities that come with that supported by new and improved ai coding tools and enhanced capabilities to actually deliver more tailored software to our customers quicker as part of our standard offering We have a good opportunity to actually rapidly increase our contract conversion or contract asset conversion and work with all of our customers and everything that sits on our order book even more than what we've already been doing. So I see that as a very positive development in our engineering team. the opportunities and abilities that come with that we're obviously continuing to focus on optimizing our operations i would say that we are now at the end of q1 we're at a good level when it comes to our opex and and our cost base we have been looking also at our capitalization and how we how we work with that and we will continue to enhance those but really for from where we are right now the focus in in focus in investments is in go to market and growth so that's where we're gonna we're gonna continue to focus also on on increasing our ability in our engineering teams and and also obviously in the ai tools required to do so but really uh and the right hand picture or the picture on the slide here on the right hand side is It's an example of when we are out meeting our customers and really making sure that everybody's aware of the Exonaut software and what we provide into the defense space, as it is very much still a piece of work that we need to continue to push. And to do that, we need to continue to invest in those areas as well. So looking forward now, we are obviously continuously optimizing and Veronica is doing a great job in terms of making sure that we spend the money in the right place. But we also need to invest in terms of our go to market and to push our software and our products out to our customers. uh i'm looking forward to the hard work that remains during the second quarter and and the rest of the year here but i do believe that we're now in a position where we are where we've gone through a lot of transition as we said or as veronica said we've reduced our head count by 35 people which is quite a lot for a a small company like 4c and we've i think now found our new sort of our new way of working and and our focus forward and and really pushing hard ahead with that as well so uh with that i will open up the floor for uh questions i see we've got a couple of questions online so we'll get to those uh and if you have more questions then please just prompt them in as we speak so we'll move on to questions Right. Okay. So let's go through some questions then. We will start with the questions coming in. We have one here where it says, you've said for several quarters that deals have been postponed. When do you actually expect to see a pickup? I think that's a fair question. And we're obviously working really hard with With our customers, as I mentioned in the CEO comment as well, there is a significant interest. And after the end of the quarter as well, we've had a number of trade show engagements and other engagement with our customers. And I think from my perspective and my experience of having worked in this customer space for a for quite a while now, there is a change in the attitude on the end user buyer perspective that they feel that they have more opportunity to buy things and money available. There is, however, unfortunately now a a bit of a gridlock when it comes to procurement and obviously still larger programs take precedence but we are seeing a significant uptake and we are working really hard to make sure that we will close out a number of key opportunities over the coming quarters and yeah I mean without going into too much specific details I think we'll be able to look forward with a positive outlook and you know as I said initially we haven't really lost any of the uh any of the deals that we've been working on they have been however postponed into into the second quarter uh I think also we have a question here. Can you give some more details regarding the change in accounting and revenue, how much of the revenue is related to these changes? Well, also mentioned in my comments, but we're looking at approximately an impact just on Q1, a reduced top line of around 12 million SEC, which obviously then follows all the way through. So that impacted our result. It is now, in the order book instead. So we will be getting that revenue later, which is the whole point of doing this change in revenue recognition. And as I also mentioned, it is about us trying to level out a little bit how this works, but it's also very much about the fact that the value and what we deliver to our customer has changed in terms of you know, looking at licenses with the historic value of license that has been produced, and then the continuous development of that, and also in line with the new AI technologies that are available. So approximately 12 million. And then as I mentioned, or as we also mentioned in the report, there is also a fixed one off cost of approximately 4 million related to the related to the staff reductions and optimization programs.

I think it's important as well to say that it's not that we feel that we have done something wrong in the past it's more that we want to show a little bit clearer the connection between the revenue and the cash conversion.

Yeah and also I mean it's about the value it's about the performance delivered to the customer at the end of the day when it comes to how you how you recognize these things. I can take this one as well and then maybe on to some for you Veronica. Could you elaborate some more on the big revenue drop in EMEA compared to last year and how the momentum in the US is progressing with regards to the shutdown parts? So two things really in Europe and NATO during Q1. One of the things as we mentioned as well is that there was a quite a significantly lower activity when it comes to exercises delivered specifically in the UK during the first quarter. This was due to a number of different internal UK resources, such as they're waiting for the defense investment plan to set out the targets for the year, the year and the years to come. And that in the u.s or the uk budget year runs until the end of the first quarter which means that they were they were holding quite tightly in in spend uh which meant that some of the exercises reduced in scope and that hit our services revenue quite significantly we also had uh some delays in uh in in the new contract in europe which we were expecting uh and and also uh some slippages so So the main part comparison to last year was a lower services revenue as well. And then we're expecting that to come back quite significantly during Q2 when they're now into a new budget year and also doing some sort of retake of exercises that were delivered during Q1. That was that one. All right. Okay. Let's see. We've got some questions here as well. Yeah. Yeah.

We have one question about our further cost measures planned. We have already, as we mentioned before, implemented the comprehensive cost reductions program. And even if you can't see a big change in Q1, we can see the full effects now in Q2. And we saw it also a little bit by the end of Q1. At this stage, we believe that the current cost base is appropriate, but we will, of course, remain disciplined and will take further actions if needed.

Yeah, absolutely. I think where we are right now with the market interest that we have and the change that the company has gone through, we're now focusing on how we will grow and how we will you know, try to bring back the company to the next position. When we look at the full year estimates and the full year outlook, I would say I'm still optimistic that we will deliver on those and And to do that, we need to invest in AI solutions, we need to invest in the right types of engineers, and we need to invest in sales and go to marketing resources. We're doing that now by reallocation of resources, but we're also doing it by looking at where we can grow in terms of... in terms of what's next for the company. There is a question here, just to be clear, is there any differences for the customer at all regarding the changes in accounting, or is that purely an internal matter for 4C? Well, I mean, there isn't really... I think the customer experience has changed already in terms of what we're delivering because of the way that we've gone from a few contractually obligated upgrades per year to a much tighter release cycle of the software and the ability to make changes quicker and work more directly with the customers. From their perspective, I think that the experience of continuous deployment has already has already changed. Now we haven't yet. And the accounting principles and IFRS, et cetera, hasn't necessarily followed suit with the terms of how software is built in 2026. But I think so. So the changes we're doing now is internal accounting changes, which will impact how we recognize revenue and and give a clear alignment as we move forward. Could you elaborate a little bit more on conversion of contract assets? Do you still expect a positive net effect during Q2 and full year 2026? Definitely for full year 2026. It depends a little bit obviously on the types of contracts that are signed during Q2. As Veronica mentioned, we converted slightly more during Q1 than we brought in new. And then there were FX and some tax changes on that as well, which meant that the contract assets slightly grew. But all in all, we are expecting with this new way of recognizing revenue, we will then obviously see a gradual decrease in contract assets and a closer alignment. It depends a little bit on what types of contracts are signed and the duration and length of those, as it's still the case where the upsides of us signing a really long agreement with a defense customer that has subscription license components over time, I would say still outweighs the negative optics of having large contract assets as they are then gradually converted and paid year on year. Could you elaborate a bit more on the momentum in the US to expect to convert any new COTS customers during 2026? How has the momentum progressed as the shutdown in parts of Q4 and any deals slipped? Yeah, I mean, as we mentioned, we signed two new deals in the US during Q1 with an order intake combined of just over 40 million, which is really positive. We are continuing to work on expanding our COTS base. There is quite a lot of turbulence in the army space in the US based on some recent or month ago or so now changeover in senior command structures. This creates short term turbulence and our types of procurement processes in the US are sort of They are smaller than the large programs in America, so to speak. So they are quite dependent on engagements with these individuals. And when there is a lot of changeover in staff and people at decision positions, then it takes time. But absolutely, we are working on quite a lot of deal opportunities in the US. We've got a trade show ongoing at the moment in Washington, where the interest is really good, both with the Army, the US Marine Corps, the Navy, and the Space Force. So there are broadening opportunities in that space. So yeah, we're definitely targeting new cold steels as part of the continued growth in the US in 2026. Done that one. How has payment terms with customers changed since inception in 1999? How have they worsened over time? So the question is around the way we contract. Well, in a way, I would suppose they yes, they have worsened a little bit because we historically a lot of our customers bought perpetual licenses. And when you buy a perpetual license, it's a payment upfront for that license. So that meant a large, large amount of cash coming in early. Now, this is not some not a way that most customers today want to buy software. but rather they choose to buy subscription models. And as we've said, that would be the way we previously recognized revenue, according to IFRS, that that created a bit of a delay in terms of when we got cash in. And when you go through that transition, then that obviously impacts your cash flow initially, whereas it improves over time, right? So yes, it's changed. I'm not sure to say if it's worsened, but it's changed. And I think that the, I noticed the cost for resilience in Q1 2025, So I said there is a question about costs for resilience in the program. And I think we can take it a little bit more generally. A large part of the costs associated with our investment into the resilience program was in our R&D team. It was engineers, it was UX designers, it was engineering manager, product managers, etc. And those obviously sit in the group common costs as part of our MD team. And so there is a big reduction there. Our actual, just if we look purely at the resilience team right now, they're down to around six people who work full time with that operation. And and servicing our 26 customers in the segment. So we are expecting, as I mentioned, we're expecting a cash positive resilience in 2026. And then based on the old, old REBREC principles, which was pre January 2025, we also still have a bit of a catch up to do when it comes to revenue within resilience. But as of 27, we are expecting resilience to be a net contributor on the revenue side as well. um and i think we will probably stop there uh veronica and obviously a big thanks to everyone uh for joining um a a bit of a tough start to the year for 4c uh based on the q1 results on the other hand looking very looking very optimistically towards the remainder of the year. And there's a lot of hard work that is ongoing and that needs to be done. So thanks for the continued interest and to everybody out there and follow this space for more news. And we look forward to engaging with all of you in the near future. So thank you very much.