Clavister Holding AB (publ.)

Good morning and welcome to our Clavister Q4 interim report presentation. My name is Aurore Gotthard and I will be your host for today's session. And presenting the report today are Jon Vesperi, Clavister CEO, and David Nordstrom, Clavister CFO. We will start today's session with the presentation of the Q4 report and we will then have time for questions. So please use the Q&A box on the right to submit your questions throughout the presentation, and we will get back to them at the end. So now, without further ado, I would like to hand over to you, John, for the presentation.

Thank you very much, Aror. And again, welcome to this seminar. As usual, I would like to start with providing a bit of a summary of the quarter. So this quarter saw a very strong order intake. We reached 134 million in order intake. Extra positive is that the contribution of order intake came from all our business areas in previous periods. It has been always one or sometimes two business areas that has sort of fallen behind. But but this time we have all business areas running on all cylinders, so to speak. That meant that our net sales grew with 23% and ended at 59 million SEK. Important to mention as well is that our annual recurring revenue from our software subscriptions continue to grow in this period with 14%. So that provides obviously a solid base for our net sales generation going forward. This means as well that we have at the end of the quarter, consequently at the end of the year, an order book of 300 million SEC, mainly related to orders within the defense and telecom sectors. From a balance sheet perspective, we also agreed an accelerated amortization plan with the European Investment Bank during the quarter with the purpose of faster reducing our net debt and reduce the impact from our financial costs. If we look at one of our key market segments, the public sector in Europe, this is a sector that continues to represent one of our most important customer groups or customer segments, especially in these times where, of course, the continued geopolitical unrest including nowadays the uncertainties about the impact from the policies from the new US government, clearly drives demand for domestic European cybersecurity solutions. In the pie chart to the right, you will actually see the the importance rated by the public sector in EU on cybersecurity being produced in Europe. And as you can see, more than 65% actually considers this an important or even very important aspect. And we continue to see this in the business discussions we're having within this sector where previous years or going even further back, this was basically not a topic at all, but it has moved to one of the top priorities looking at security vendors, which obviously is a very positive news for Clavister. A few examples within the public sector. So we were able to secure an important win from a law enforcement agency in Europe. It's a software license win for 3 million SEC worth of licenses for firewalls, with also an expectation from both sides to continue to expand with this customer also with other products from Clavister's larger solution and product portfolio. Within our identity and authentication solution group, we also source quite several, quite many licensing agreements on that software within the Swedish public sector, especially within the municipalities, regions and selected state authorities or state agencies. If we look at an adjacent sector, the energy utility sector, this is actually a sector which quite recently has started to grow significantly from a cybersecurity investment perspective. So in recent reviews or research, we consider energy utilities to be actually the fastest growing cybersecurity industry segment in Europe. So we're looking at close to a 20% CAGR or 18% CAGR from this year through 2035. Valued this year at 30 billion SEC in our target geographies only. So that would be, of course, Western Europe. Why is this important? Well, I mean, if we look at the growth drivers, we have talked previously about the... the regulations the increased regulations such as nistu that drives not only awareness but also strong demand on additional cyber security another growth driver is of course the the technical convergence between the the operation technology systems within energy sector and the more common it systems and when you open up the typically unsecured or insecure operational technology networks towards the public internet, for instance, you also open up for a completely new set of attack vectors. And this is one of the areas where OT security becomes highly, highly relevant. We're addressing this with new solution offerings. And in this quarter, we also launched our Cloudister NetWall 200R product, which is our first OT-specific cybersecurity product. It builds upon many, many years of our software development, shares the same software as all of our other Firewall products, but it's more you know purposely built packaging wise and hardware wise to suit the characteristics from from that industry within the energy and utility sector our primary customers include the local regional and as well the nationwide energy providers so the energy sector is an important upcoming customer group for for clavister still within our focus being mission critical customers If we move to another mission critical sector, the defense sector, one of the important news from the quarter was an additional contract that we managed to sign with the systems. for cyber securing the CD90 infantry fighting vehicle. The contract was worth 53 million SEK approximately and concerned deliveries to one Scandinavian country and an Eastern European nation. We're not able to disclose the names of those nations. The contract extends over three years, so this means that the initial deliveries are scheduled to start later this year, second half this year, and then span for approximately three years. With this latest agreement, we now have our security products integrated into CV90s that are delivered or being delivered to six different nations. So this has quite rapidly become an important revenue driver and revenue generator for CleverServe. And with that said, it's also important, I think, to emphasize that as up to this point, only deliveries to one nation has had an impact so far on our revenues and earnings. So additional nations, deliveries to additional nations will start providing revenue support for us from the second half of this year. That's, I think, an important thing to remember. Still within the defense sector, we see more and more interest for our cyber security products for the defense industry. One of the reasons for this is traditionally, if you look back a few years when you had a lot of time and maybe not too much money, not too much budget. The industry was accustomed to building tailor-made solutions, purpose-built just to fit maybe one specific use case or one specific customer. Now, obviously, with the war in Ukraine and the increased spending and the need for accelerated deliveries, this has basically changed dramatically. Nowadays, customers, the defense industry and the end users, they prioritize standardization rather than customization. This is good news for Clouster for a very simple reason. We are a standard product company. We're not building bespoke or tailor-made solutions for our customers. So our products for the military domain are designed to be standard products. So this has gained quite a lot of interest when we address new prospects and new customers. Sometimes with an impressive question mark from the customer, wow, you have a product already. We can buy it already. This is great news. We're not used to this. So that's an important benefit. Another defense-related news from the quarter was our initial entrance into the naval or marine domain. So up until this point, we've been mainly located within the so-called land-based applications, be that vehicles or other types of land use cases. However, during the fourth quarter, we had the benefit of getting approved as a supplier to a very large Nordic defense company. Can't disclose the name, unfortunately. and entered a first contract with them for cybersecurity for a naval or marine application. First contract worth 8 million SEK, deliveries starting already now, this first half. And we see this as an important step where we can basically start also replicating our cybersecurity technology to the naval domain as well. If we look at the telecom business historically, as you all know, it has been a bit of a troublesome market with a lot of consolidations, a lot of restructuring happening with the consequences that there hasn't been too much growth in the telecom domain. And that has, of course, spilled over to our sales as well. I think we have highlighted in previous quarters that we've started to see early signs of recovery. And I think this fourth quarter continued on that trend. So we did see even more signs of recovery and consequently for the business we have as well. More practically, we saw a new contract for a North American mobile operator for our firewalling software, as well, hardware shipments and consulting. We have also been active, we're still active in converting our legacy telecom installations that were mainly based on perpetual licensing contracts over to the more modern term based or subscription based contracts. That's a quite lengthy type of work, but it obviously fuels recurring revenues for us going forward as we continue to success with that transition. So in the period, we had the opportunity to convert two of our Asian mobile operator customers to the new licensing model with also a subsequent order value of 4 million SEC coming in the quarter. In June last year, we announced a business opportunity in UK. We had to announce that opportunity. It was an early opportunity. We had to announce that for regulatory reasons. The customer at hand was 3UK, the large mobile operator in UK. And since the announcement of that opportunity, there has been a merger process going on in the UK between 3UK and Vodafone. Since a number of months back, the competition agency in the UK has been reviewing the merger and late in December or in December, they approved the merger. That's that, of course, changes the dynamics with this operator quite a lot in terms of new organization, updated technology platforms and so forth. So we can just conclude that the way that opportunity was structured last year is no longer the case. So we will lower the expectations on that deal. at least in its original form, and take one step back and look at sort of how this merge evolves and what type of new business opportunities this translates to. With that, leaving the word to David to walk us through the numbers.

Yeah, thank you, Johan. So let's start with order intake. Only looking at the numbers, we see a decrease of 38.4%, but let's deep dive into that a little bit to give some more explanations to the underlying performance. As you know, we had quite large or very large BAE contracts in Q4 2023, roughly 170 million SECs. We managed, importantly, to get one more, as Jon talked about, a BAE contract of 53 million SEK in this quarter. If we adjust for them to see how is the underlying business performance, you will then see a 72% increase of order intake in the underlying business, meaning that this quarter, if we look under the large BAE order, we're doing 80.7 million in order intake, which is, if we compare it to previous quarters, well, that is our best performance in the underlying business by a large margin so far. So I would say then a a good order intake from the business. We see order intake increases in all parts of the business. We haven't really seen that all parts are delivering so clearly in the previous quarters this year, but in this quarter, all parts are doing that. So glad to see that. We can move forward. They're looking at net sales. There we see that the order intake growth that we are having is translating into a clear net sales growth of roughly 23%. Again, that growth is coming from all parts of the business, leading to clearly our strongest net sales quarter so far, almost reaching 60 million sec of net sales growth. Clearly, the trend is there and the trend is slowly but steadily bending upwards in terms of the growth trajectory. So pleased to see that. Continue with that. Then looking at the gross profit. Sorry, the ARR. ARR-wise, increasing the growth trend, landing a 14.4% increase in ARR. We talked about this a bit in Q3 where ARR growth was a little bit slower. We then said that we saw quite clear growth in Q3 and especially in the later half of Q3. And just as a reminder, we record ARR when a customer have started a license. So from the time when we sell a license until the customer have installed the license and then started it, it is a time lag of roughly 30 days. So we said that we expected ARR to increase in time. in Q4 on the back of the development sales wife in Q3. And we're then moving into 2025 with a solid foundation of ARR contract, but also with sold but not yet started contract. So glad to see that then we're moving into this year with our largest ARR base so far. combined with our largest order book so far, which creates a good foundation for delivering growth in 2025. And then we talk about gross profit. So gross margin-wise, we land around 77% in this quarter, a decrease of roughly 0.5%. Gross profit wise, we see a clearly growth with more than 25%. So we are translating our order intake growth to net sales growth, turning that to both improved ARR and improved gross profit. Then from a gross margin perspective, let's look a little bit into where our growth predominantly coming from. It is our more margin weak parts of the business that stands for most growth in Q4. We see a lot of growth from the defense part of the business, but also from our civilian firewalls. And these are the business areas with a little bit weaker margin profile. So if from a Cleverson perspective, our IAM business is with the on average, the strongest gross margins. Followed by telecom, where we typically have more software in the sales mix than hardware. Then comes civilian firewalls. And lastly, up until today at least, our defense sales where we see a more hardware-centric delivery profile, even though we have pure software deployments as well to our customers. So given that sales mix, I would say that a 77% gross margin is clearly quite strong. And as you know, when Clavister is growing, we have a short-term impact on gross margins as we are leading with hardware to enable new customers to run our software. And here the hardware centric businesses are leading our growth. So hence we see this operating leverage in this quarter. We see some more cost increases increasing with 16.3%, clearly growing slower than our net sales that's growing with 23. But I think let's talk a little bit about the OPEX increases because When we have this big order intake increase in the underlying business of 72%, that has an impact on sales commissions. So the clearest cost driver in this quarter are related to one-off effects due to sales commissions based on high sales growth in the quarter. The second impact, which is also a one-off, is the fact that we had our court proceedings related to the lawsuit of what we believe are IPR infringements in our identity and access management business. We had court hearings in October. That led to, of course, costs related to that of roughly 2 million SEK. They are also not structural costs that we carry with us. They are one time effects in this quarter. So there are some underlying cost increases, of course, as clavister is growing. But the majority of the costs are one time effects. Then talking a little bit of what are we seeing ahead of us? We have been talking about ourselves for quite some time as a turnaround case. That turnaround from our perspective is going well. We're clearly taking steps and making Clavister more profitable and we see more and more stability in our growth. So we are clearly on a growth journey. We are not yet relabeling ourselves to a growth case, even though we're nearing that point. So you that have been with us for some time know that Clavister has been in a Cost reduction phase that then moved into a cost control or cost stability, maintain cost phase. And now we are moving over into a phase that was more, say, call it focusing on profitable growth. And in order to reach that, of course, cost will be a high focus to make sure that we have control over cost. But in order to grow and grow with profitability, we will do selected investments in sales, predominantly sales and marketing going forward. So you should expect to see growth growing a little bit, but slower than our net sales growth. It's clearly slower, but still growing. And EBITDA. growing with almost 56% in this quarter. As you know, there is a seasonality in our business where Q3, I would say always shows the best EBITDA profile, depending on on the cost structure of the business. But comparing quarter to quarter, we see that the EBITDA growth journey in Clavisier continues. We're landing on on roughly 11 million in in adjusted EBITDA and raising our adjusted EBITDA margin to 17 percent, comparing to 14 from last last quarter. So I would say the trend line of of improving EBITDA, it is it is clearly there, even though this quarter is weighed a certain to a certain degree with one of cost as we talked about and maybe a little bit unscientific. But still looking at the rule of 40 mark as a quality stamp of a SaaS business, this is worth mentioning that this is actually the first time that the combined net sales growth and the adjusted EBITDA margin in Clavisor is at that 40 mark. So glad to see that because, of course, if we say that we're chasing growth, Profitable growth, seeing that we're growing the business and also growing the gross margins. I'm sorry, the EBITDA. Well, very important. So glad to see that. And then looking at, OK, our performance versus our ambition. We have had a target of saying that we would reach 20 or above 20% net sales growth. In this quarter, we're landing on 23. So reaching and overperforming versus the target. Gross margins, not entirely on the 80 percent mark, a little bit under. But as I said, we are delivering a solid growth in the quarter and the growth predominantly comes from our hardware centric businesses of civilian and military firewalls, which dampens the gross margins a little bit. We had a target of 20 or above 20 adjusted EBITDA margin, reaching 17. So not fully reaching that target, but the trend line is there. So we're step by step growing our EBITDA margin. And operational cash flow, we said it would be positive, and it is positive. So reaching that target. Saying yes very shortly, though. that the growth has impact on our operational cash flow where we're binding quite a lot of accounts receivables. But that is a temporary growth effect. So we should see more support in coming quarters from that. So I stop there. Thank you, David.