Clavister Holding AB (publ.)

Good morning, and welcome to our Clavister Q1 interim report presentation. My name is Aurore Gautheur, and I will be your host for today's session. And presenting the report today are John Vesperi, Clavister CEO, and David Nordstrom, Clavister CFO. We will start today's session with the presentation of the Q1 report, and then we will have a time for Q&A. So please use the Q&A box to submit your questions throughout the presentation, and we will get to them towards the end. And now, without further delay, I would like to hand over to you, John, for the presentation.

Thank you very much, Aurora, and again, welcome. As usual, starting with a quick summary of the quarter of Q1. Taking a bit of an outlook first into the geopolitical situation, not dwelling it into too much, but it is a very important point that I think sets the narrative for both current, but definitely future growth of Clavister. So, I mean, obviously it's no news. We have wars raging close to our borders. We have all the hybrid warfare going on. We see attacks on critical infrastructure, on energy grids, on the financial systems. Just the other week, we had a blackout of the Swedish bank ID system as one example. What might be... less obvious, but for us in the industry, it's very obvious these days, seeing a strong pro-European agenda driven by political leaders in Europe, by business leaders. with the narrative to drive a European digital sovereignty. In other words, having less dependency on American, Israeli and other countries' technologies. Naturally, as a cybersecurity company, this is good news. I mean, the reasons are perhaps not good given what's happening in the world, but the consequences for European industry is good, especially in the cybersecurity industry. So we see examples happening all days long now with companies driving anti-American technology agendas, looking at European alternatives to American cybersecurity products. And I think we've been quite clear in previous communication that the good news is that there are not too many european cyber security vendors with the type of portfolio that that cloud has the bulk of the ecosystem is is is us-based vendors uh so that's good news even though the circumstances are are dire if we look at some numbers we saw a really really strong order intake growth in the quarter 190 percent growth And of course, a key part of this is additional defense orders, but there is more as well, which they will dwell into a bit later. If we look at net sales, we reach 53 million SEC of net sales in the quarter. That corresponds to 21% growth, even in the current very interesting currency effect situation that we have, which also they will come back to. So strong net sales growth. And all together we then have an order book of 356 million SEK. So if you recall from the previous quarter, we closed exactly at 300 million. Now we increased the order book quite significantly. At the end of the quarter, we closed the Series 9 warrant exercise with a fantastic outcome, 98.9% exercise rate, which is slightly higher than even the Series 8, which was good. So that adds good cash to Clouster and allows us to further reduce our debt levels, which is exactly according to the plan. Moving ahead to some of the key events and key business details in the quarter. So one very important aspect of the quarter was the growth of deliveries in hardware products or hardware units. We saw actually 111% year on year growth of shipments. That's probably the highest growth we have in shipments. What's important here is that this is typically sort of a two step process. The first step is delivery of hardware. The second step is the activation of software running on that hardware. So every device, every hardware unit we ship is typically, there are some few exceptions, but typically every hardware consists of or carries a Clavister software license. So as a consequence of this, when the products reach the end customer, when they get deployed, when they get registered, when they get started, that also triggers the start of a recurring software license revenue. So all of these deliveries happening in Q1 sets the tone for upcoming software subscription license revenues going forward. That's a very, very important message. We've communicated before as well that given that we take the full cost of the hardware directly at delivery, when we have this high growth of deliveries, it also pushes gross margin slightly. and that's temporary. But despite these high volumes, we're proud of maintaining a solid gross margin, 75%. It's a few percentage points lower than our average target of 80%, but it shows or it demonstrates that the gross margin is really resilient despite these really, really high volumes of hardware. So that's one of the key messages from the quarter. If we look at some of the main events, some of the selected events in the defense sector, we had the opportunity to be selected as a supplier to a new defense customer, a major European defense company. Drawback working in this industry is that we cannot disclose names typically. Anyway, this customer is a completely new defense customer to Clevester, so it adds to the overall portfolio that had started with BA Systems and getting complemented with more customers as we go. This customer or this company produces a range of different defense systems that are used by over 100 armed forces worldwide. So it's a well-established industry, well-established company. In one of the new systems they have designed for some years now, they have then selected Clavister to be integrated as a cybersecurity component in this new system. The interesting thing, and I think we've alluded to that in previous calls, that in the defense systems, even though the The lead time to getting from initial contact to order is long, typically several years. Once we're in these systems, we're sticky for a very long time. This specific system has an expected lifetime as communicated to us by the customer for over 20 years. So this means that as long as we play our cards correctly, we will likely see revenues coming from this customer for 20 years. If we look at the systems still within the defense sector, then, of course, we were able to close a new contract for the CB90 infantry fighting vehicle delivering our cyber armor product family to yet another European nation that are deploying CB90s. This time the contract is worth 68 million SEK and has an option as well to grow the contract potentially down to 96 million SEK. So quite a significant order in the 790 family. The contract spans over three years. Serious deliveries are planned to start early 2027 and then continues for three years. With this, we have now established a footprint where our products are being used by not less than seven different nations using the CV90 platform. So that's fantastic. That's really good. Worth to remember still is that if you look at our P&L, there is still only one nation that has an impact on revenue and earnings, which is the contract that we signed in 2021 that we are in serious deliveries on at the moment. Additional contracts that we have signed, they will start providing revenue support from the second half, from late 2025 essentially. So the bulk of revenue coming from the contract base will start 2026 and span over three, four years. If we look at the civilian side of things, we were able to sign a contract with what we refer to a global technology provider. It is a company that delivers real estate technical solutions or technology to the commercial real estate industry. They needed a solution to basically overall increase the cybersecurity footprint across their infrastructure. They had evaluated a number of vendors for a while, including American vendors, and eventually decided to go with Clevister, which we were, of course, really happy with. The first contract we signed with them spans or is valued at approximately 15 million, and we have already started on delivering on that. We also announced quite recently an interesting collaboration with NXP semiconductors. If you're not familiar with NXP, they are a well-established leader in electronics. They build CPUs or controlling units and so forth for the automotive sector specifically. There is Since a while back, perhaps a couple of years back, there is a UN directive, a UN resolution that mandates civilian car manufacturers to integrate technical solutions for cybersecurity in cars, in civilian cars. Even though Clavister has specifically not indicated or not selected the civilian car industry or the automotive industry as a target vertical, we are still, of course, exploring these type of collaborations where partners can bring our technology into other segments. In this case, what NXP is doing, they are integrating our AI component or AI technology into one of their CPU platforms. And by doing that, we together with NXP are able then to basically push the narrative to the automotive industry. The demand is there obviously due to the UN resolution, but able to demonstrate to the industry that here is a perfect example of technology runs on well-established electronics components, being able to provide the level of security and the type of security that is required by regulations. So super interesting collaboration. Of course, it's a bit on the technology edge. It is more research than commercial, but definitely driving an agenda and sets the tone and spreads the Clavister brand where we need it. Moving on to David and walking us through the numbers a bit more.

Yeah. Thank you, Jan. So we start with order intake. So as Jan said previously in the presentation, we see 190% growth of order intake for the first quarter. Definitely the large BAE order is is, of course, very important to land in this large growth. But we've also been seeing a very good momentum and strong growth in our civilian firewall business. So these two are leading the order intake growth in the quarter. Looking at the order intake trend, we see that we land on, again, above 300 million over the trailing 12 line. So that's also, of course, very positive. Net sales wise, we see that we have been able to translate quite a lot of the order intake in the period and also deliveries from the order book we had in Q4 to deliveries in In Q1, we have quite big impact on FX effects. As you know, it's quite a lot of turmoil on the currency market. So the SEC has improved quite substantially versus both the euro and the USD during the quarter. And since roughly half of Clavister's sales comes from euros and USD, mainly euros. This, of course, has a negative impact on our net sales. So if you look at FX adjusted net sales, that lands on 24%, so well above our target. However, as said before, when we're tracking net sales growth performance, we do that on reported numbers. So 21% growth then, but with big FX impacts. And the biggest driver here is a good momentum in the civilian firewall business. I mean, we have seen good growth with the focus we're having. And then clearly the geopolitical risk that we're currently seeing in a narrative where more and more companies, government agencies and so forth are looking for European solutions to protect their cybersecurity. That has a positive impact. I think the majority of that impact is in front of us, but we see some impact on sales already in Q1 from that. from the new administration in the US. ARR wise, we continue the growth trend with an 8% increase in ARR. However, it is clearly then a decline from Q4 2024. So why is that then? Those who have been with us for some time might remember that we did a very big overhaul of our entire financial or sales model back in 2021. We moved from contracts with more of perpetual parts in them to a new subscription-based model. When we did that, we end of life announced those product lineups three years ago. So they were possible to renew them for the coming three years up until 1st of January 2025. And so the absolute majority of the contract we had back in that day has, of course, been transferred to the new business models. However, Not everything, especially what is churning here is a larger volume of many small contracts, contracts where we do not have a direct engagement relationship with the end customer might be many small SMBs. And they are not very close to the reseller either. Many of them might not even know they have a firewall. So that's what constitutes the churn base. It's a one off effect. Attributed to the product lifecycle decision three years ago, so this has nothing to do with us trending downwards when it comes to ARR, but it's an impact isolated in Q1. Gross profit wise, well, we grew net sales with 21 percent. Gross profit is growing with 12. So there is a gross margin impact here. So we have increased hardware sales substantially in Q1. And of course, that comes with an impact on gross margins. So I would say with with that. high growth, I would say we're quite pleased with maintaining such a strong gross margin of 75% with much more hardware in the sales mix. As you know, clavister is typically definitely in the civilian firewall market, also in defense, but generally we are leading with hardware. So when we establish new contracts, there is in most cases a hardware element associated with it. So day one, there will be a hardware. a hardware revenue and a COGS element. Day two, it will only be a recurring software component. So that comes with that impact. So we can say during this quarter, civilian firewall sales has been very strong. That's weighing heavily in the sales mix. Hence, there is a little bit more hardware in the sales mix than landing on only 75% cross margin. That in turn, we're looking at operating leverage. As we said during a later part of 2024, we see that there's a good market opportunity for Clavister. The Trump administration would increase geopolitical risk, has made that, I would say, market opportunity for Clavister even better. We have been saying for some time that we see that we come from a trend of lowering cost, holding cost, but now gradually with control increasing cost because there is a good market for us. So the cost increases are in line with our plan, mainly constitutes of investments in sales and marketing and some increased R&D capacity for us to be able to utilize the market potential we see. So that's the main reasons for somewhat increasing OPEX. EBITDA then, so of course the combination of good growth But with a gross margin impact driven by mixed factors in Q1, together with larger OPEX investments, we have a somewhat impact on EBITDA in this quarter. It is not large, but of course, it's a setback, but mainly driven, I would say, by the mixed factors in sales, where I think the gross margin will likely be higher in coming periods. but still supported from good net sales. And I would say OPEX is under, definitely under control, but some EBITDA enhance also EBIT impact in the quarter. So for the financial ambitions and current performance, well, sales CAGR will be at or over 20%. So landing on 21, despite big FX headwinds. uh gross margin well not not reaching the 80 mark for for this quarter but i think there will be other quarters this year where we'll be have where we have more margin support uh ibita at or above 20 so far reaching 13 so that's a little bit below but i think there's a lot of things uh indicating from our perspective a good potential to come in with a higher EBITDA performance in coming quarters. And operational cash flow, we see the improvements of the growing business in our cash flow. So both cash flow from before working capital changes have improved and we have been very successful in improving the working capital in Q1. So clearly strengthening cash flows after working capital effect. So that's in a good direction there.