Clavister Holding AB

STO:CLAV

Earnings Call Transcript 2021-Q1

[Jenny Ramkrans, Chief of Staff]

Good morning, everyone, and welcome to this Clavister Q1 2021 Interim Report Presentation. Today, I have our CEO, John Vestberg, with us; and also our CFO, David Nordstrom with us. We will start with a presentation, and then after the presentation, we'll move into a Q&A session. But shall we get started, John?

[John Vestberg, Co]

Yes. Thank you, Jenny. So good morning, everyone. Jumping directly into our interim report, starting with the executive summary. We saw a somewhat slow start of the year and basically attributing that to some lingering effects still from the COVID-19 pandemic. However, this slow start recovered quite significantly towards the end of the quarter with large important orders, especially in a few selected areas. That resulted in an order intake, which is back on a growth path, ended up with SEK 36.1 million, which is corresponding to a growth of 12%. The areas contributing with the biggest increase includes our 5G area and sales within the Nordics public sector markets. That also means that we arrived at an order book balance by the end of the quarter of approximately SEK 30 million this is quite a drastic increase from the same period last year with close to SEK 20 million of order book increase. The majority of this order book will be delivered and invoiced during the course of the coming 12 months. So a quite near-term realization of the order book. Our net sales adjusted for currency effects in the quarter amounted to SEK 31.6 million, corresponds to a 10% year-on-year growth. And we maintain a high gross margin, 86%, slight increase from last year attributed mainly to a quite high proportion of software sales in the period, and we see that our average deal sizes become larger and larger as we go. We keep a close eye on our cost control continuously, and as such, we're able to reduce our operating expenses somewhat despite the fact actually -- or on a positive note, despite the fact that we have now an expanded, larger go-to-market organization that drives a more cohesive go-to-market operation, and despite that, we have slightly reduced OpEx. Our EBITDA came in a little bit lower than last year, mainly impacted by 2 items: lower other revenue and a few nonrecurring OpEx item amounting in total to SEK 2 million. The change in cash position, minus SEK 32.5 million. David will go through the details in a while. This is mainly driven by nonrecurring items and quite large working capital adjustments. Moving into one of the business areas where we had really good traction in the period, in the 5G security area, where we were able to secure 3 new mobile operator wins in the period. The largest one was a Latin American nationwide mobile operator. The initial contract value to Clavister amounts to approximately SEK 6 million which is one of the largest, if not the largest, 5G win we have up to date. The interesting thing with this deployment is that compared to many previous ones, this is a super versatile deployment where the operator decided to use our solution for multiple use cases, and those include backhaul security, namely, the communication between radio network and core network. It includes securing the public Internet access and securing the roaming interface, basically the connections between the operator and other operators and also internal segmentation of the core network. That's a use case that we see quite a strong increase of in general. And as said, this is our most comprehensive deployment to date. Another win, which we also announced is an Australian mobile network, which is being built for emergency services, a so-called public safety network. This is another of those emergency networks where Clavister solution has been chosen. Previously, we are running a similar network in APAC as well. And finally, the third interesting mobile operator win in the period was one of the largest U.S.-based Tier 1 mobile operators. They selected the Clavister solution for a start for their internal core network segmentation as the initial rollout. And then as we go, there is potential for this operator to scale up with, of course, additional use cases and additional capacity. We continue innovating in the area of 5G security. We have added a number of recent innovations and enhancements to our solution set, and of course, doing this to strengthen our position as technology leader in this space. One example is a recent update to our software, which represents the world's fastest virtualized solution for securing networks -- securing 5G networks rather. And we are able to demonstrate data rates of over 600 gigabits. And this is, of course, very technical. But in comparison, you would need heavy special custom-built hardware equipment to achieve similar rates with competitive solutions, and we can do this on a single Intel-based CPU server. This is, of course, a strong enabler for those mobile operators who are taking the step from 4G to 5G or implementing new 5G networks altogether, where virtualization is key, but limitations in capacity in virtualized solutions in general have been a bottleneck for the operators. So this is a clear enabler for that. We also announced a newly awarded European and U.S.-wide patent, a patent that we have innovated for shaping network traffic in high-performance environment. So this is another enhancement to the technology that enables high capacity 5G security solutions. Moving on to defense, another area picking up pace. And as a reminder, in quarter 1, which we also announced earlier, was our first end customer win through the recent partnership with BAE Systems. The end customer is a major Western European military organization who are equipping updated vehicles with Clavister products. The contracted value for Clavister, this is a committed contracted value of SEK 50 million. There are some additional add-ons and options to this deal that could potentially increase the value up to SEK 90 million in total. In quarter 1, we received the first product order as part of this SEK 50 million. And these are for the initial products then being shipped as starting then from the second half of 2021, and then the majority of the big volume of products will be delivered starting next year and be carried out over a course of 3 years approximately. We have quite a good deal funnel as well, a sizable deal funnel, with large opportunities with other defense customers, some through BAE Systems, some through other engagements, including our partnerships in the U.S. and other customers still to be named. Some of these opportunities have potential still to materialize as wins already in 2021. Keep in mind, we are looking at long-term engagements and long lead time deals here. But still, some deals can be materialized already this year. So with that, leaving the word to David.

[David Nordstrom, Chief Financial Officer]

Thank you, John. So some comments on the financial performance. One, I would like to start with one change introduced during Q1 that is important to be aware of. During the recent years, we have based our comments and analysis on the revenue -- on total revenues rather on net sales. But starting from this year then, from Q1, we have made a decision to focus comments and analysis on the net sales performance rather than total revenue. The reason for this is that net sales are depicting the underlying performance of the business in a more correct way than other revenue who is more volatile in nature than net sales. So that is -- it's clearly stated in the report as well, but I want to mention it here because those of you who have been following for some time might notice that this is a change. So as John said, we have an order intake growth of 12% in the quarter. We had a quite slow start of the quarter, but a good pickup to the end, especially in March with several important wins. This translates then over in our net sales growth, who since lots of the deals materialize, end of the quarter, the full impact of a couple of those are not impacting net sales as of yet but will fuel net sales going forward during 2021. We have a growth, excluding FX effects, of 4%. We had some FX headwinds in the quarter of approximately SEK 1 million. And during the first quarter of 2020, there was a very rapid deterioration of the SEK versus euros and U.S. dollars due to COVID effect. So all in all, FX-adjusted net sales growth is 10% or corresponding to SEK 3 million. We have been able to maintain a strong gross margin of plus 85%. I'm very happy with the fact that we are -- we've been able to lowering our COGS and increasing our net sales in the quarter. This is building on also information that we said in Q4 that we had during 2020, we bought immaterial property rights that have given us flat fees in certain software that we're using, and they are then supporting our COGS as we are having lower COGS in selling our services to our customers. We have an OpEx decline in the quarter, not a very big decline, but still there is a decline. We have nonrecurring costs of approximately SEK 2 million in the quarter. So if we would deduct those costs, our OpEx decrease is actually coming in a bit stronger than what we're seeing in the P&L. So then we are having SEK 40.6 million of OpEx compared to SEK 43.4 million last year. I think all in all, I'm very positive to the fact that we are demonstrating that we are -- we have the capacity to increase our net sales while keeping our costs under control. So I think this is a positive delta that we keep showing. We did show that also during Q3 and Q4 last year. So this is a positive delta that we are very glad to maintain. We have negative FX effects in the quarter. They are not as significant as of last year. As you know, we have a SEK 20 million loan and so we are sensitive to currency changes between SEK and euros since this creates a volatility in our financial items. Most of our financial items, however, have no cash flow effect. So out of our SEK 10.4 million of financial items, the items with no cash flow impact is SEK 10.9 million, and the items with a cash flow effect is actually positive in the quarter of SEK 0.5 million. The positive effect is mainly due to release of reserves that have a onetime effect, so I wouldn't overstate that going forward. But still, I think it's a message that we think is important to repeat that our financial items are, to a very large degree, noncash. Another couple of points. Our CapEx investments are a bit lower in the corresponding quarter in 2020, but we are expecting CapEx investments in 2021 to increase slightly compared to the full year of 2020. And this is in line with the -- our investments in our tech portfolio and our -- so we're seeing quite significantly -- quite significant decreases in amortizations compared to last year. I think what is important to understand here that is, in 2018, there was a change in principles to how Clavister accounts for capitalized development work. Prior to 2018, capitalized development was amortized over 3 years. And in 2018, that changed to 5 years. So therefore, we will see a short-term impact in amortizations that will be lower due to the change in accounting principles. Looking at cash flow in the quarter. So cash flow from operations before working capital changes are positive. So there is a increasing underlying profitability in the business, which is positive. However, we have large negative impact from working capital changes in the quarter. I would say these are driven by two factors. One factor is the seasonal effects between Q4 and Q1. We tend to see a buildup of debt in -- which is quite natural in Q4, where we are closing different contracts, et cetera, and having more costs in Q4. Those costs then translates into payments made in Q1. So Q1 tend to, from a cash flow perspective, be a bit weaker in Q4 due to the seasonality. Then there is a larger effect of nonrecurring payments that we are doing in this quarter. One large one of SEK 12.4 million is related to payment of transactions costs related to the large share issue in Q4. Those costs were sitting in the balance sheet in Q4 in accounts payable and then paid in Q1, so they have a very big negative impact in this quarter. During 2020, we decided to, like many other companies, use the possibility of postponing tax payments in order to preserve cash as a government support related to COVID-19. We have, during Q1, started to pay those deferred tax payments and that is also a big impact in the quarter of SEK 8.5 million. And we will pay the remainder of approximately SEK 4 million during Q2, and then all deferred tax payments will then be paid. So I think what is then important to understand here in cash flow is that there is more than SEK 20 million that is related to payments of costs that are not related to business performance in Q1, but they are of a nonrecurring nature. So I think these are -- this is important to understand when looking at the cash flows and not overstating the cash burn that has -- that is disconnected from business performance in the quarter. Looking at FTEs, we are seeing a slight increase from 132 to 137. And these are primarily driven by investments in our tech and go-to-market, which is building on the communication made in conjunction to the shares issue, what would the proceeds be used to do, yes. We said that, that would be used to finance selected investments in our tech portfolio to drive further growth. I think the press releases we have seen during Q1 and up until this day are some proof points on that and also to do selected go-to-market investments in sales and marketing in order to drive further business growth. So all in all, that was the -- my comments regarding the financial performance. So just to then repeat the ambitions and planning assumptions going forward. So over to you, John.

[John Vestberg, Co]

Yes. Thank you, David. So we maintain our same ambition level as we stated also in the fourth quarter of 2020, and just to summarize what those are is that we plan to see a revenue growth or net sales growth then rather in this year over last year. And if we look at the average growth over the next 3 years, we should absolutely be above the underlying cybersecurity market growth. That is, however, a quite a wide and broad definition, so we translated that into an organic growth of at least 20% on average. And that we in -- during the course of this year will reach a sustainable EBITDA profitability level. And then, of course, the long-term ambition is still to demonstrate the profitability and free cash flow levels that are on an industry-leading level. And given our, as David mentioned, our good and positive delta increase between net sales and cost, this is absolutely viable and I think this is being demonstrated as well in our strong gross margins. So with that, leaving the floor open for questions.

[Jenny Ramkrans, Chief of Staff]

Yes. Great then. [Operator Instructions] To start it off, John, what are you most proud of in this report?

[John Vestberg, Co]

Right. Thank you. That's a good question, as always. So I'm happy to see that despite how slowly the world is really recovering from the pandemic, that we are now seeing a good uptake in order income. We're seeing that we can demonstrate also net sales growth even though, as David mentioned, many of the orders came in very late in the quarter. On the other hand, that translates into a strong order backlog. Actually, it's the strongest order backlog we had to date and that, of course, translates to a good delivery pace from the company going forward. So that in combination with really interesting orders, that's what I'm proud of.

[Jenny Ramkrans, Chief of Staff]

And David, if you could highlight something, just one item in the report, what would that be? Just one thing.

[David Nordstrom, Chief Financial Officer]

That was tough. I will highlight just one combination of factors in the report. So -- and that is -- and repeating myself really, and that is I'm happy to see that we're able to demonstrate growth at a lower cost. I think that is important because we have stated before we have made investments in our organization that are able to drive more revenue growth -- more net sales growth, sorry, for us. And I think that is what we're seeing and I think that is very positive.

[Jenny Ramkrans, Chief of Staff]

Thank you. I see no questions come in. However, we have seen an uptake on the press releases going out. John, this is not about the report, but we see a change. Can you comment on it?

[John Vestberg, Co]

I think the important takeaway there is that we have, over a period of time, been evaluating our market communication policies. We know from good feedback, constructive feedback, from both customer, partners and shareholders that we would benefit from telling the market more about all the good things that is happening in Clavister. And so to one hand, we have just decided to explain and tell more about all the activities we're doing. On the other hand, we're also seeing a larger business activity in general that drives new deals, new innovations and more newsworthy things to communicate. So it's a good mix of those things.

[Jenny Ramkrans, Chief of Staff]

Thank you. A question coming in. How important is the demonstrated solutions together with Intel products for 5G and sales going forward?

[John Vestberg, Co]

It is actually very important. The reason being we're alluding back to what I commented on this performance being an enabler. Keep in mind that the history within networking, not only security, but in networking in general, has been and is still, to some extent, dominated by hardware specific -- or custom hardware equipment, which has been de facto standard for reaching high capacity. So it's not that surprisingly to see that many larger customers, including mobile operators, have a healthy skepticism in the beginning looking at fewer software-based solutions where the key question is, can a pure software solution really scale to the same extent as a custom-built hardware, which was designed for high performance. And in order to sort of mitigate that skepticism, we need to provide proof points, we need to provide test reports, we need to provide live demonstrations of deployments where we make it super clear that, yes, software can really outperform hardware in this case. So it is important. And we are seeing already good pickup on that information and that news and stronger interest from the market on it.

[Jenny Ramkrans, Chief of Staff]

Thank you, John. One more question. Could you talk a little bit more about the potential outside BAE?

[John Vestberg, Co]

Absolutely. So what we have done within our defense solution is basically to make use of the underlying technology platform, technology portfolio. We have then augmented that with a number of enhancements that are related to defense requirements, NATO requirements and so on. And we were then able to onboard BAE Systems as actually not the first, but the largest customer to that solution. Prior to that, we have already engagements, which we have communicated earlier, although -- a while back with Saab, for instance. Saab is including our solutions in a limited scale, I have to say, but still in some of the products they are shipping to defense customers. We have defense engagements in Germany with another public reference customers in the terms of Eurofighter. And we have actually a range of other potential engagements. We announced in the previous quarter an engagement with the U.S. Marine Corps, where they took on our Identity and Access Management solution, deploying that initially for a few thousand of employees. And if that deployment turns out successful, it will likely scale to the larger U.S. Marine Corps employee base of several tens of thousands of users. So there is a big -- not only big potential, but big activity and big business underlying that solution in general. We have so far been a bit modest in terms of the investments we've been doing in go-to-market. This has been mainly driven by management activities and management sales. But going forward with additional traction, this is an area we would be happy to explore with more go-to-market investments.

[Jenny Ramkrans, Chief of Staff]

Thank you, John. Does anyone have more questions? If there are no further questions, then we will -- oh, there's a question coming in. Could you elaborate on the security solution for utilities and opportunities in this area? Thank you.

[John Vestberg, Co]

So if I understand the question correctly, with utility we mean then critical infrastructure, power grids, et cetera. So you might have seen just this Monday there was this very big ransomware attack on Colonial Pipeline in the U.S. where also Clavister got some quite good media coverage on the back of that, where a lot of the EU media were interviewing Clavister to get comments and expertise statements on that. The -- I would say, the utility sector, as such, is -- and critical infrastructure is probably one of the areas who are most targeted by cyber attackers, reason being quite obviously that we're looking at not only direct impact in terms of an enterprise being vulnerable or direct impact in terms of an enterprise being hostage to ransomware. But in the case of critical infrastructure, we see the indirect impacts as well. So in the case of the U.S. Colonial Pipeline, first of all, you have to stop oil and gas shipments, which impact transportation. As a natural consequence of that, you impact deliveries to grocery stores, to restaurants, to medical supplies, to hospitals. So you get an avalanche of impacts that is really, of course, disturbing for community. And to that end, it's quite easy then to understand that the willingness to pay, in this case for ransomware, ransom is much higher because the stakes are so much higher. And as a result, hackers see this as a very lucrative target. The good thing is that in most of the critical infrastructure customer networks, we're looking at quite standardized needs and requirements. So a Clavister product that would fit in a school environment or a 5G environment or even in a defense environment would serve a similar purpose also within critical infrastructure. Now that said, Clavister have not, at least not yet, been focusing on critical infrastructure that much. We're focusing on our key customer groups being the public administration, public sector within Europe, our 5G customers and our defense customers and we like to continue that way to demonstrate growth in those before expanding into adjacent verticals. But from a tech point of view, the solutions are highly viable also for those segments.

[Jenny Ramkrans, Chief of Staff]

Thank you.

[David Nordstrom, Chief Financial Officer]

Yes. And could I just add a little to that. I mean there is -- I think that is a very good question because it is a very relevant area. And the reason for not expanding more into utilities is, in order to keep costs under control, we have to be very selective on which verticals and which solutions do we address. So it is, to a high degree, to also say resource constraints that we can't address every interesting area that we -- but that doesn't mean that we will not planning to do so going forward, but not yet.

[Jenny Ramkrans, Chief of Staff]

To keep the focus.

[David Nordstrom, Chief Financial Officer]

Yes.

[Jenny Ramkrans, Chief of Staff]

Yes. In which area segments do you see most potential in the coming 12 months?

[John Vestberg, Co]

Out of the 3 customer groups I just mentioned, we see quite evenly distributed growth potential with, I would say, different characteristics. And that is probably the more important part where for instance, within defense, long lead times, high volumes, highly committed contracts, but over a longer period of time. Typical high risk/high reward type of business. A bit similar in the 5G space. We have come further in the 5G space. So we have an installed base. We have multiple partnerships. We have good end customers. We have solutions that are scaling well in that segment. But the segment is still attributed to quite large customer decisions, infrastructure project decisions, which can be time-wise lumpy and hard for Clavister to really steer the business or be in control of the business, whereas in the more let's call it, a run rate, a smaller type of business and also within the public administration, time-to-market and time-to-revenue is shorter, the deals are more frequent and we have a better position in -- also being in the driver seat in many of those deals. So all of those 3 areas are really hedging each other in a good way, but all of them represent a good growth potential. So I wouldn't point out any specific one being better or worse than the other.

[Jenny Ramkrans, Chief of Staff]

Just different.

[John Vestberg, Co]

Just different.

[Jenny Ramkrans, Chief of Staff]

Yes. Could you elaborate a bit on your sales process and what you do to increase sales?

[John Vestberg, Co]

So essentially, looking at how we are building our go-to-market organization and go-to-market process is from the inside-out perspective, we have then, in Q4, built a larger commercial department. We have gathered all our customer-facing functions, including sales, of course, also marketing, product marketing, technical support, professional services, training, customer project management and so forth into one cohesive single department. Reason for that is to have one unified way of go to market, one distinct process of going to market. So that is one of the growth drivers based on essentially our existing organization, but in a way, restructured, reshuffled and enhanced. Looking then at the sales process outwards, we are working with different type of go-to-market partners in some areas, especially within public administration. As mentioned, we have a higher degree of end customer relation. That does not mean that we close deals or transactions directly with end customers. Typically, our products are part of a larger infrastructure sales or a larger deployment where a larger system integrator comes into play. So our go-to-market partners are typically either service providers or larger system integrators. In some cases, OEM type of customers, the example with BAE Systems and even Nokia are examples of OEMs where someone takes our technology, relabels it, integrates it into a larger solution and sells it on a much larger scale. That is one of the key growth elements for Clavister: to be able to scale by utilizing the scaling bandwidth and the scaling engine from other parties. If we would build up a sales organization that would address all customers directly and close transactions with end users directly, that would be extremely time-consuming, obviously, and of course, massively costly. So we are basically continuing on that track, narrowing down focus -- continuing to focus, continue to increase volumes, continue to build awareness. And you might have seen also recently that we announced new additions to the sales team, a new VP global sales in the shape of Mats Wenner, formerly Nokia; taking onboard more senior, more qualified sales processes; building larger customer engagements; building on the processes and the solutions we have at the moment. So we're not planning to do any changes really to our go-to-market strategy. It's rather backfilling with additional resources, additional competencies and continue on that path. That's really about.

[Jenny Ramkrans, Chief of Staff]

Thank you. If no more questions, then I will conclude this session.

[John Vestberg, Co]

Yes. Thank you very much.

[Jenny Ramkrans, Chief of Staff]

I would like to thank the audience for the participation and good questions. Thank you, John, and thank you, David.

[David Nordstrom, Chief Financial Officer]

Thank you.

[John Vestberg, Co]

Thank you.

[Jenny Ramkrans, Chief of Staff]

Thank you.