4C Group AB

Good morning everyone and welcome to this second quarter earnings call for 4C Strategies. My name is Jonas Jonsson and I'm joined here today by Veronica Wallin and I'm the CFO for 4C Strategies.

Good morning.

So great to have people joining. We will take you through the presentation of today's quarterly report and we are happy to take any questions. Please write them in the chat as you will and then we will take them as we progress through the Q&A section at the end of the presentation. Just checking to see that everything is working. Right. OK. So in terms of a presentation of today's quarterly report, so The second quarter for Forces Strategies is always a busy quarter. There's a lot of outreach activities going on and we've also got quite a lot of delivery ongoing, which is a really positive thing for us, obviously. We've been working hard with our product optimization and innovation. We'll come back to a little bit of that and you read about it in the report as well. We have conducted numerous sort of outreach activities together with our customers at trade shows around Europe and and around the world and we have also conducted our annual user forum with our defense customers from around the world so a positive quarter we've seen the training activities come back up to the volumes that we were expecting from a slightly slower start at the start of the year in Q1 and then obviously Of course, we closed a slightly major deal at the end of the quarter together with some customers in the United Kingdom. So we'll come back to that as well. But please type in any questions that you have and we'll take you through this presentation. So looking at the numbers, then we we closed out the quarter at ninety five point four percent or a million SEC net sales, which is with a software revenue of sixty seven percent. So a strong uptake compared to last year's quarter two. We had an ebbet of. 13.2% and an EBIT margin of 14%. So a recovery quarter, I would say. We're still trailing a little bit behind if you look at H1 compared to where we were expecting to be and where we were last year. But all in all, I would say a solid quarter, obviously supported by revenue from the final closing deal back in June. But also, as I mentioned, exercise activities coming up, which has been supporting both software and our services revenue, our expert services delivering according to plan and so on and so forth. So a solid quarter and a good change compared to where we were at the start of the year. You can also see that our costs are now at the levels that we were expecting them. So our cost saving program has now come into effect and we can obviously see that impacting our operating margin. So starting off with the contract that we announced on the 29th of June, We're still in a position where we need to be reasonably close hold in terms of information around this, but a significant win for 4C Strategy is something that we've been working on for a really long time and we're obviously very, very proud about how this played out. Being able to sign a contract of this size and this duration is not something that happens to us every day. And we're super proud to be able to enter into the delivery phase of something that, as I said, we've been working on for a really, really long time. So it's approximately £55 million spread out over a 15-year period. It's a fixed price contract that comes with indexation, though, so we are expecting it to grow over time. There are significant opportunities within this contract as well to expand into wider opportunities, but also then to see how the delivery of this can frame deliveries in other countries around Europe and the world to build additional new opportunities as well. Now, the United Kingdom is one of our core markets. The UK MoD is now again and still is and has been for a long time our biggest customer. And I think that the confidence to be able to win a contract like this from the customer side is something that we built up over a really long time. We're super happy about that. We will be delivering this in parallel with our current and previous contract within this space over the next two or four years, depending a little bit on how it plays out. So we are expecting this to be a significant positive contribution running over time. and give us that continued solid foundation to build on in the UK and Europe. So really, really positive contract. A long-term commitment solidifies our position within the training domain in the United Kingdom. Looking slightly wider at the defense space then, we can see, as I mentioned, that our software and supporting revenue have gone up to the levels that we are, slightly more normal levels. We had a strong development in EMEA obviously supported by this contract at the end of it. We do see a continued strengthening position across Europe and also that the market momentum is improving even though the execution is still uneven and there are a lot of bottlenecks in terms of procurement and in terms of the way that we are able to contract. But I would say that we've finally seen the defense investment plan in the UK which is basically the execution of their defense budget. So we are expecting increased momentum in the UK during the second half of the year, in addition to what I just mentioned. We are seeing that training investment budgets are now going up at a rate that they have not done before. If you look at both in the US and in Europe, money allocated for the specific areas in which we operate are increasing in budgets, both for 2026 and 2027. And we are working on a number of deals which are to be closed in the near future around, well, basically all three of our areas, both in the US in EMEA and in APAC. So positive momentum I would say, still a bit lumpy and we are expecting fluctuation between the quarters. A lot of focus now going into the third quarter to really progress our position in the US as that is working towards the end of its budget year. A lot of exciting opportunities. And I would say, given the discussions that we've had during the second quarter with all our customers and potential new customers, there's a lot in the pipeline. So positive from that perspective. Looking a little bit wider then on our resilience and expert services, as we've previously communicated, our resilience software business is focusing in on our existing customers in our core market. We have now executed the cost program, and that is in fact from Q2 and onwards. We are still targeting a positive cash flow for our resilience software business for 2026. As I mentioned previously, The historic revenue recognition models means that we may still see from a P&L perspective that it is trailing a little bit, but that's going to pick up as well. And we have had a positive ongoing implementation within our sort of newer customers that were announced back in the last year and earlier this year. both within NATO and in European Defence Organisations, where we are delivering our resilience tools to help them become more resilient in the way that they operate. So tracking that closely, making sure that we invest the focus that we have left on resilience in a structured and positive way, but really keeping a close eye on operating margins and making sure that we focus that segment into the best possible outcome. Third but not least, looking at expert services, it has had a stable development during the second quarter. We closed out at just around 17 million of top line sales. And we are seeing a healthy demand within especially the total defense space, both here in the Nordics, but also growing in the UK, which are our two prioritized markets for our expert services business. That is developing well. We are looking at how we can increase sales during the second half of the year and really pushing ourselves out into the market because there is significant effort being put in place and We've also worked really hard to deliver on core projects during the quarter. One to just as mentioned, there's an election year here in Sweden this year, and our consultants have been working really hard during the quarter, working with the election agency to make sure that we train them in preparation for the election so that they are more resilient and more resistant when it comes to influence activities and other things in preparation for the election. Just one example of how Forces Strategies is working with government and government organizations to help create a more resilient society in the world that we're living in today. So, All in all, I would say that from a segments perspective and a sales perspective, we're still trailing a little bit in the second half, but obviously a really strong end to the quarter with the major deal in the UK, which you're going to see in the order book. and the order in tech, which Veronica is going to mention. But a lot of positive movement, still a lot of work to do, and we're pushing hard to continue to improve our position. So I'll hand over to Veronica for a bit of more details around the numbers.

Thank you, Jonas. So starting with the P&L, net sales increased by 26% to 95.5%. 4 million compared to 75.6 million last year. That was driven primarily by a stronger software revenue following the new customer agreement signed by the end of the quarter. As expected, the second quarter showed an improvement compared to Q1. Revenue development benefited from a strong performance in EMA, while some expected business in North America was again delayed due to timing effects. The improved revenue mix, together with the benefits from the organizational changes implemented last year, that resulted in a significant improvement in the profitability. A bet reached 13.2 million and that was corresponding to a margin of 14% compared with a minus 16% the same quarter last year. If we look at the business mix, defence represented around 77% of the total revenue in the quarter and that is reflecting both the strong demand that we have in the defence market and also our strategic focus in this segment.

Yeah, no, absolutely. And I think if you just look at the 77% coming out of the defense, I think that's sort of where we will be expecting it to sort of be as we move forward. And we are seeing strong demand signals and working really hard into converting those as well. So positive movement on that side, but also reasonably strong in the other ones. So that's good.

Yes, if we turn to our financial position, we ended the quarter with a cash of 1.2 million. During the quarter, because of that, but also we announced a full secured rights issue of approximately 54 million with an over allotment option of up to around 20 million. The subscription period commenced today and the rise issue is intended to strengthen our financial position and also ensure that we have the resources to execute on the strong order book that we have built, but also continue to invest in our defense sales capabilities. If we look at the contract assets it increased by approximately 33 million to 318 million and that is mainly reflecting the major customer agreement that we signed towards the end of the quarter. We also continued of course to convert contracts assets into invoicing during the quarter but it is worth noting that the increase would have been even larger without the updated assessment that we now do on the revenue and how we allocate across these contracts and that is the result or its result in a more balanced build up of the contract assets over the contract term. Going forward our priority remains to be disciplined execution and convert our growing order book and contract assets into revenue and also of course invoicing and make sure that we ultimately stronger cash or make it stronger cash generation.

Yeah, no, absolutely. And I think the rights issue that we're executing now will will give us a good position to move forward. We do need to invest a little bit into this new contract with some front loading of cost. We are expecting to be able to invoice a significant amount towards that contract within the next 12 to 18 months and then linearly executing on that over time. And we are expecting to see contract assets go down as we progress into a new model where we look at how we recognize revenue or how we look at the delivery of our software in relation to how we then recognize that revenue. and so we are expecting this to start to go down but it is going to take some time and with contracts like this one especially then that is a bit of an anomaly I would say in terms of how because of the length and the size of the contract that creates a bit of an anomaly but all in all a very positive impact for us of course.

If we go into the order intake and order book, the order intake reached 683 million in Q2 and that is making by far our strongest quarter to date. The increase was, as Jonas mentioned, of course driven by the largest contract in the company's history and that was signed in the UK defence sector. As a result, our rolling 12-month order intake exceeded 1 billion for the first time. This also lifted our order book GME record of 960 million, up 222% compared to Q2 2025. These are important milestones for the company and, of course, it's strengthened our revenue visibility and demonstrates our ability to secure large long-term contracts that also support future growth.

Yeah, no, absolutely. I mean, looking at just the sales and the order order intake and now currently the order book as it stands, you know, being able to secure this level of of new contracts. And then, you know, obviously, of course, now we're going into delivering on those. But to be but to have, as Veronica mentioned, the rolling 12 months order intake exceeding one billion for the first time is something that we're extremely proud of and to be able to get those commitments from our customers on firm fixed price contracts and actually Important to mention as well that this is not framework agreements. These are actually contracted deliverables in the future. So really positive in terms of where we are. We now need to execute on our strategy and deliver on all of this. But all in all, obviously, the order book as it stands is something very, very positive for us. So looking forward then in terms of where we are and what's going on, a busy period coming up. I think, as I mentioned, the second quarter has been a positive step change for us. We worked really hard during the start of the year to make sure that we would be able to execute on a lot of these opportunities before the before the summer period. But as we now move forward, we are very clear in our focus, and that is focusing in on our defense business continuously, making sure that we take and we hold the position that we have both here in Europe, growing in the US, securing and protecting our position in APAC, and really working hard to deliver on that order book and working with our customers. We are Also, of course, continuing on looking at our cost optimization and cash conversion from our existing contracts. We are still trailing compared to where we were expecting. And there are still delays in execution, especially in our North American projects. We are expecting that to pick up during the third quarter. And we also had quite a significant pickup at the back end of the second quarter where we were able to invoice significant amounts at the back end of June. So that's a continued really strong focus from us, of course, to make sure that we put ourselves in the best possible position for continued growth. And then final point here is working really hard together with our engineering product and design teams to look at product innovation. We have released a major upgrade to update to our defense platform during the second quarter. We are releasing continuous development within our resilience platform to continue to stabilize that towards our customers. And we are in a different position now, I would say, in terms of how we're able to deploy software and how we're able to work with our customers continuously supported by AI enhancements in both code generation, but also testing, hardening, and really supporting that innovation. So when we look forward, we're going to be focusing very much on execution within defense. We are looking to strengthening our defense team further with additional sales capacity around the world. We will deliver on our order book and look at continued cost optimization and really focusing in on the cash conversion. And in the same time, making sure that we're staying at the front line in terms of what is required to continue to support the military build up and the enhancement of readiness in Europe, in the US and in APAC. So those are our key core focuses going into the summer period here in Europe, but at the same time, obviously full speed ahead in North America and in APAC as well over the next quarter. That was today's presentation. So moving into Q&A, let me just shift here and see what we have got. Is Q2 the beginning of a sustained recovery or was it primarily driven by one-off factors? Well, I think if you look at Q2 and the outcome of Q2 compared to the size of the contract that we've just signed, you can see that it's not a freak result or anything that is... massively outstanding from where we normally are. So the way I look at it is I would say that Q2 was a return to a mere more normal level towards the trajectory of continuously increased stronger quarters. I would say that it is it's more in line with our expectations. And but at the same time, obviously, the business is continuously volatile and we are going to see ups and downs in the in the coming quarters as well. working hard now to get a flying start into the third quarter. Some of the things that we were trying to close out in Q2 slipped in and slipped out and we're hoping to be able to execute on those in the very near future. and then really working our way towards a strong end to the year. Q4 is usually a very good quarter for 4C as well, as you're aware. And the second half is a stronger half when it comes to cash conversion due to the timing effects of license periods and so on and so forth. When do you expect to be cash flow positive in a rolling 12 months. Well, we are working really hard and we are expecting to be cash flow positive, I would say, by the end of the year. We are continuing to increase our cash conversion and looking towards going back to a positive organic cash generation. We have significant contract assets that we're working to convert and We are expecting to see an uptake on a lot of those project deliveries during the year. So full focus on that and expecting an increased cash position as we move forward through the remainder of the year. Order intake in the quarter amounted to 686. Does that order intake relate solely to the large UK defence contract or does it also include others? Well, it is a combination of that contract and others. The reason the deviation between that order intake and what was communicated also in the press release and in other places is due to FX. And so that was one of the contracts, obviously a large bulk of the numbers that you would have seen, but not the sole contract in terms of closing out the quarter. As I said, we had some deals that we were working on, which has now slipped into the third quarter. So we're hoping to a good start in Q3 as well. All right. Any other comments from Veronica?

No, we didn't get that many questions today, so maybe we have answered them in the report. Otherwise, you're more than welcome to contact us.

Yeah, no, let's see. You previously talked about updating the medium and long-term goals. When can we expect to see some guidance there? Well, we are working on that, continuously looking at, but we want to see the quarter stabilize a little bit. We want to see the The purchasing cycles, both in the US and in Europe, go back to what we think is a slightly more normal process. As we've mentioned, we are seeing quite a lot of bottlenecks, especially in the procurement agencies where things are being held longer than what we're expecting. so we are and we've also changed as we mentioned the way we recognize or the way we look at our software delivery which leads to the way we recognize some of that licensing revenue predominantly and also support so we are looking to to update that we can't give you a firm fixed timeline at the moment but working on that towards the future and hopefully we'll be able to tell you more about that and also we'll be sharing more information about this new contract that we just signed and more details about what it is just as soon as the rest of the party and are sharing that information as well so we'll be getting back to you on that and hopefully with additional new new contracts as well new product releases new exciting projects that we're delivering so thank you very much for listening into this call and please reach out if you have additional questions or thoughts and follow us in the in the different medias where we exist. And hopefully we'll see you all around during and after the summer. So thank you very much for your attention and have a great continued Thursday.