Clavister Holding AB

STO:CLAV

Earnings Call Transcript 2024-Q1

[Kate Linwood, executive]

So good morning, everyone, and welcome to our Clavister Q1 Interim Report Presentation. My name is Kate Linwood, and I am going to be your host for today's session. And with me today is John Vestberg, our CEO; and David Nordstrom, our CFO. So we will start today's presentation with the Q1 report by John and David. And after that, we will have a Q&A session. So please submit your questions at any time in the Q&A box during the presentation. And then at the end, we will answer all your questions. So -- and with that, I would like to hand over to you, John.

[John Vestberg, executive]

Thank you very much, Kate, and again, welcome, everyone, to Clavister's Q1 report. Starting with a summary of the quarter. And the key metrics that we bring to this quarter is starting with our net sales, SEK 44 million. This is, in fact, our highest Q1 sales number ever and our second highest net sales ever as well. This contributed with a 21% sales growth. So I'm really happy to see that we can actually now celebrate 10 consecutive quarters of sales growth and 2 quarters of growth with more than 20%. So that's great we're super happy on that. Also, our EBITDA margins continue to improve. So this quarter, we arrived at 18% of adjusted EBITDA margin. So we're touching on the famous Rule of 40 with a combined 21% growth and 18% EBITDA margin. If we would characterize this quarter with one single word, I would use the word stability. So in essence, it is a stable business, all of our 4 businesses with Next-Gen Firewalling, Identity and Access Management, Telecom and Defense. They are all stable and developing in a good direction. And the outlook in our perception is good for all the 4 businesses. One of the growth drivers in the quarter was the serious deliveries from the defense contracts that we have entered into, and I'll get back to that a bit later as well.If we look at the full year, we maintain a positive view. We do expect our net sales growth to be able to continue on this growth trajectory and to be able to settle in above 20%. That's our clear expectation and what we see from the trend we're into right now. With regards to expenses, here, again, I would use stability to characterize our OpEx. It is an OpEx under control. It's actually a slight, even a slight decrease of OpEx. If we zoom out and look at the full year, we don't see any major deviations to our OpEx trend. And also, we expect the full year OpEx to be on par with what we've seen from last year as well.In terms of our cash flow, quite a significant improvement of the underlying cash flow. However; if we look isolated in the quarter, looking into working capital effects as well; we have some lingering effects coming from the fourth quarter. And this is the time of the season where we also build up a fairly larger stock for shipments and for deliveries during the year. And with the prepayments for those, we have somewhat a negative impact on the cash flow in the quarter. That's temporary, however. If we again zoom out into the full year, we do expect our cash flows to increase substantially compared to last year.And last but not least, in the quarter, we finalized our rights issue, and that led to quite a substantial improvement of our cash position. So we raised after -- complete after transaction costs, we raised SEK 142 million.Moving to David, if you could please give us some more details on the numbers.

[David Nordstrom, executive]

Yes. Thank you, John. And for those of you who have been with us for some time, you will see that this is a big change of format. So I hope you will enjoy this and please share any feedback you have with us. So if we look at order intake, this is the lumpiest of our metrics. You will see that in quarter-by-quarter figures. And if we look at Q1 compared to Q1 last year, we see a 10% growth. That is delivered primarily by, as John said, by stability in our business predominantly within the Identity and Access Management business and Next-Generation Firewall. Important here when you look at order intake is to look at the last 12-month trend, where you see that we have clearly increased that to a high degree due to very large defense contracts won in Q4 that supports this. But with the performance in Q1, we are increasing the trend line with the improvements compared to Q1 a year ago. But also important to carry with you is our order backlog, which has increased compared with Q1 last year from SEK 73 million to SEK 227 million, which is a very good foundation to generate future net sales growth. So if we look at net sales, here, we can see, when we compare it to order intake, that the lumpiness decreases, it's much more underlying stability in our net sales as that comes from a large volume of many recurring contracts, meaning that net sales for us is more stabilized.We see a 21% growth compared to Q1 last year, not generated by any single deal, single contract within the quarter, but rather underlying growth and underlying improved levels of the contract base. Here, again, I think it's important to look in the upper part of the picture on the trend line on the last 12 months trend line. We see a continued increase. And as John said, this is our 10th consecutive quarter with net sales growth, and we see that the trend line is increasing as we progress in time, meaning that our growth performance are increasing, which is, of course, something we're very glad to see.And then moving over into ARR, you see that the trend of stabilization also increases. Here, we zoom in on the annual recurring revenue in the software portfolio. We have been able to progress in line with the strategy we set out in 2021 to move Clavister from perpetual licenses to a SaaS-like business model that sits with recurring revenues. And we've been able to grow that continuously.And just to share some light on this, I think this growth comes from 3 areas. In the bottom, you have an increased number of recurring revenue contracts. So we are expanding our contract base. That's, of course, very important to generate more ARR. The second part is when we did the exchange strategy 3 years ago, one important part of that was to shorten our contract base. So we have a shift that is meaning that we are moving from predominantly focusing winning 3- to 5-year contracts to zooming in to be better to generate 12 month and monthly contracts. And that means that over time, we have a better profitability in our contract mix because shorter contracts have better price points than longer contracts and from a discounting perspective, we will also shift more power away from the customer to Clavister -- if there's a shorter contract, it is harder to negotiate for discounts, meaning that our price levels are better in shorter contracts.And the third part here is we have raised prices when we went into this year. So we have a better price mix with us, supporting more ARR growth. And as the contract base is shorter, it more quickly can absorb price increases. So these 3 factors, I would say, explains the ARR growth.So we move forward. And we can look then at our gross margin. We grew net sales with 21%, and we're growing our gross profit with 17%. So we are not capturing the full net sales growth in our gross profit. And the reason for that is what was said earlier by John, that one important growth driver for us in the quarter is that we're scaling up the deliveries within defense to BAE Systems. There, we have a little bit of a less favorable gross margin profile than we have in our other parts of the business. So that has a somewhat -- it is good for driving net sales, but it has a certain impact on gross profit as it is a bit lower within this part of the business.But I think if we also -- if you compare Q1 to Q1, we go from 83% Q1 last year to 80% in gross margin this year. But I think it's more also important to compare with Q4 when we had similar growth levels of a little bit above 20%. There, we had 77% of gross profit. So if you've been with us for some time, you know that we try to communicate that in periods with higher growth, we have an impact on our gross profit. And then why? Well, the answer to that is when we sell and start more contracts, we have a more negative gross profit profile day 1 since we ship more hardware. Day 2 and onwards, there is no hardware element only the software element, which has then very good gross margin. So when we grow, there is an impact on our gross profit.So compared to Q4, we have improved the gross margin quite significantly even though we have more defense sales in the sales mix. And this is explained by 2 factors. We have been able to build a higher ARR level mean that there is more software in the sales mix with better margin support. And the second part is an ongoing work with ensuring that we improve our gross margin within our Next-Generation Firewall sales, which we've also been successful in doing. So these factors combined explain that we can have improved gross margins even though we have better growth. I think that is important for us to communicate.Then on OpEx side, we are -- even though that we are delivering 21% net sales growth in the quarter, we were able to decrease our OpEx with 2%. So we are utilizing our resources more efficiently and being able to scale growth with the cost base we're already having. So that's something we're proud of.If we look at this from the sustainability perspective, we see that we are taking Clavister step-by-step to a position where we're able to fund our business with the profits that we are generating. So if you compare gross profit to the -- in the left part of the picture on SEK 36 million and then OpEx -- and bear in mind here that OpEx includes capitalized R&D. So our full operational cost for driving the Clavister business that sits at 39%. So we're not fully there yet where we see that we are on a stabilized level, having gross profit that's able to carry the Clavister business. But we're clearly step-by-step getting there. So that's very important.And in looking at -- in the upper part of the picture on the trend line, we see that thanks to the cost optimization program we ran in end of 2021 and during 2022 and onwards, we have pushed our OpEx level from around SEK 180 million down to SEK 150 million. We're stabilizing around that level. We don't expect OpEx to drop further. So the scalability here from pushing OpEx down as a percentage of net sales will not in the future come from driving OpEx downwards rather maintaining OpEx while we continue to grow net sales. But that means that we will scale the business continuously better and make Clavister more robust and sustainable here. So we're heading in the right direction.And finally, as we said, with improvements in net sales, we're protecting our gross margin and we're pushing OpEx down, meaning that we have a good leverage in our EBITDA levels, up a little bit more than 300% compared to Q1 last year, our seventh now consecutive quarter with EBITDA growth. Our positive EBITDA and where EBITDA trend-wise is growing quite clearly. If we compare a year ago, adjusted EBITDA on the last 12-month perspective was SEK 1 million, now it sits with SEK 27 million. It's not -- as we've said before, it's not the end goal, but rather seen as steps on a journey where we continue to grow and push our EBITDA levels upwards. So but glad to see that our increased sales are translating into clearly improved EBITDA.So I stop there and hand over to you, John.

[John Vestberg, executive]

Thank you very much, David. I think those graphs give a very good illustration of how we're trending at the moment. If we then give some more insight into the business, we have our base business, our Next-Gen Firewall and Identity and Access Management business. Again, the key word here is stability. So stability and growth coming from both of those businesses. And given that both are characterized by annual recurring contracts and software subscription license models, they both obviously contribute to the ARR growth that David showed in the previous picture. Out of our geographical regions, the highest growth came from our Nordic sales and our German-speaking region. Maybe to no surprise, as this is where we have consolidated our -- most of our sales resources to no surprise, but good to see that our focused efforts actually bear fruit in those regions.What we're also doing as a very intense activity this year is looking at our offering, both in the IM business and in the Next-Gen Firewall business and realizing that Clavister sits on a fantastic gold mine in terms of a very extensive technology platform. We have an expertise that is, I wouldn't say unique, but closely unique, especially in Sweden. We believe that we can capitalize and monetize even more on this combination of technology and expertise. So what we are working on currently is an improved solution and product packaging. We're looking at improving our market communication with clearer website, clearer product material and so forth. And with this, we strongly believe that we will be able to accelerate our sales a bit more, doing so towards our focused customer groups, essentially customers then with mission-critical applications, as you know. So with that, I believe that we will see a number of exciting product and solution launches during this year that would help us to monetize even better on the technology platform that we possess.If we then move to the Telecom market, still, there is quite an uncertainty from a macro perspective in the market. If we look at our business in the quarter, somewhat of a weaker quarter from a revenue perspective, still stability in our operations, stability in the pipeline that we maintain. But from a revenue perspective, a slight decline. It's perhaps to no surprise either given the very much uncertainty on the market. We have hoped for a faster recovery, but we'll see when that comes. What we do, however, see is that the interest that we face in our solutions are more tangible, higher, more greater interest today compared to a few periods back. And we do see signs of operating that the operators start to invest again. The intention is there. There's still challenges on the macro perspective, but clearly, signs to start investing. So from that point of view, we still believe that our Telecom business will be able to contribute to growth. Clearly, this isn't the growth machine yet that we expect or hope, but clearly, it should be able to contribute to growth, all the signs points to that.In [ deferreds ] one of the key things from this quarter was the serious deliveries that we have entered into now that provide a lot of revenue and growth support for the quarter. It's worth mentioning, however, that the major contract that we announced in Q4, end of Q4, with h BAE Systems Hagglunds at SEK 170 million. None of that is yet reflected in our current revenues. So that's still to come. And on that note, we are in the midst of product development work and testing for that specific project. And the deliveries for that project is planned for the second half of this year. So you would see in end of Q3, in Q4 that will start picking up some revenues coming from that project. Then serious deliveries is spread out over a 4-year period, starting mainly from 2025.Besides those contracts, we are continuing with our pipeline, our prospects as well. So we're working hard to secure additional defense contracts. There are ongoing negotiations and as well technology evaluation. So obviously, as you've understood from following Clavister for a while, Defense business is a long-tail business from the initial lead to PUCs to take evaluations to negotiations. We're looking at a multiyear process, obviously. So it's important for us to have several of these type of deals in the pipeline at various stages all the time so that we can feed the pipeline and feed the business with contracts as we go. But we have a number of them in current negotiations and evaluation. So we believe that we should be able to translate them into concrete business in the near future.Moving to David again for some financial ambitions.

[David Nordstrom, executive]

Yes. Thank you. So we have an ambition of having a sales CAGR of the year '23 to '25, that is above 20%, 23% came in on -- as a whole on 13%, meaning that we have more -- we need to deliver more growth in '24 and '25 to ensure that we deliver on what we have communicated here. So in Q4, we are above that target with 21% growth. Gross margin-wise, we say that we aim for a gross margin that is 80% or above 80%, and we land on 80% in this quarter, which is important to see that we can maintain a healthy gross margin with more growth. And to be a bit open, this has been also something that we have been a bit concerned about. So this has been an important focus for us to ensure that we grow while protecting our gross margin. So this is a very strong focus for us.Adjusted EBITDA margin is also then the target to be on or above 20%. We are on 18%, so not fully there yet, but the trend is pointing in the right direction. So stay focused, continue to deliver growth, maintain a healthy margin and keep OpEx under control, and we believe that we will get there. So that's an important focus.And then we have said that for the full year of '24, [ weighing ] to reach a positive operational cash flow for the full year, meaning the cash flow from our business, including capitalized R&D. And at this point, that is still negative to a high degree, also due to negative working capital effects in the quarter from, as John said, inbound hardware shipments that were large in Q1. They will not be as large going forward, for example, we're building inventory for deliveries for later parts of this year to uphold delivery capacity. And we had unfavorable also mix with spillover effects from Q4 in the working capital, and we're binding some accounts receivables that we will believe that we're able to translate into payments when we move throughout the year. So this will -- we believe, will improve as we go forward.So I'll stop there.

[John Vestberg, executive]

Thank you, David. Then just to round off, maybe this is most important for people who are new to Clavister or as a repetition for people who've been with us for a while. But basically, the key takeaways from Clavister as an investment case. Number one, we are operating on a, as you can imagine, a fast-growing and important to state as well, a noncyclical market. So we've seen stability in the market, a stable growth. The trends are favorable, not to mention the combination of the geopolitical situation, the increased amount of cyberattacks obviously, and the technology development with AI, for instance, being an important trend. As a second bullet, what we possess is a highly mature and also very capable software stack nowadays as well AI-powered, which we need to mention. Performance is powerful, and the majority of the software is Clavister's own IPR, super important. We have already a very international and also, I would say, a very diversified blue chip customer base and a customer base that is also distributed over very many contracts. So above 20,000 recurring contracts, contracts that provide Clavister with recurring software license revenue, super important.The business model, as you can imagine, with a high degree of software in it, is highly scalable, and the gross margins and the scalability coming from that and the partner model we're building has a very interesting financial profile. We believe that we have a platform established now with the tech, the business, set up the business model, the partner landscape, the team in place to execute on that. So that should be well in place to support the future growth.And speaking of the team, it is a motivated team, counting 100 employees plus now and with very low staff turnover, which means that we've built a very robust team with essentially decades of cybersecurity industry experience. So all in all, as our opinion, of course, is a good investment case.So with that, leaving back to you, Kate, for Q&A.

[Kate Linwood, executive]

Yes. Thank you very much, John and David for sharing your insights with us today. So yes, now it's time for the Q&A session. So we've already received quite a few questions, but please keep them coming in. You can post your questions in the Q&A box. And you can also, if you want to ask your questions directly, we can -- you can also raise your hand and then we can open your microphone. So also feel welcome to do that if that is our preferred option. So yes, let's start with the first question then. So this is around the Telecom business. So can you elaborate a bit more on the outlook for the Telecom business? Have you seen any underlying pick ups in activities?

[John Vestberg, executive]

We have actually. I mean there are several signs pointing in that direction. We see that the big challenge before has been the buildup and the rollout of the so-called stand-alone 5G networks. We see clear signs now that more and more operators are actually opting in and planning for and actually building those type of networks and working with partners such as Nokia and to some degree, Ericsson, the feedback we're having the discussions we're having, both directly and indirectly with the mobile operators, gives us more confidence in that there is investments coming on the horizon.

[Kate Linwood, executive]

Okay. That's -- thanks for elaborating on that. Does the growth in Q1 come from all the business overall? Or is it only focused on Defense?

[John Vestberg, executive]

It's -- from a revenue perspective, it's all businesses apart from Telecom, who had a slight decline, but all the other businesses are providing growth.

[Kate Linwood, executive]

Okay. And could you elaborate a bit more on your Next-Generation Firewall business and the shipment of new hardware?

[John Vestberg, executive]

Quite an open-ended question, but I'll try to start. So I mean the business as such includes software as a key element and in quite many customer deliverables, we include hardware appliances, basically the hardware component that is used to run our software. In our business model today, we ship the hardware upfront, obviously, and the software business is then a license contract or a subscription contract over either single month, a few months or up to several years depending on the customer profile. What we've seen in this quarter is an uptick in deliveries. Essentially, we're starting new contracts. We're shipping more hardware than previous quarters. And as David alluded to in previous quarters, we've seen that when we've had a high uptake on volume, more shipments rather, then that has had a negative impact on the margins. We've been able to sustain the margins in this quarter despite that. So it's been an ongoing work to secure higher margins also on our hardware shipments to basically mitigate that impact. I'm not sure if that answered the question or if there were more specific questions, and please kind of follow up.

[Kate Linwood, executive]

Okay. Yes. There's some inventory buildup during the quarter. What's the thought behind this?

[David Nordstrom, executive]

We -- I mean we, of course, in order to be able to deliver our firewall software quite often, in most cases, not always, but often the customer buys a turnkey appliance. So it is an appliance with our software on it, which is required in order for us to actually be able to sell our software. We don't build the hardware ourselves. We source them from a couple of few manufacturers. Then of course, a lead time from us placing an order having them built and shipped here, that takes a couple of months. Also in order to land on both, especially favorable production costs, we need to source these in fairly big sizes, batches because otherwise, the cost for a single firewall hardware is too high, which has an impact on our ability to sell it and definitely on our margins. That's why it is quite lumpy deliveries in our inventory. So -- and -- but then we sit with quite modern appliances. We did a big refresh in our hardware portfolio a couple of years ago, and we have quite long life expectancies on our hardware profile. So it is us sourcing at a favorable price point, securing delivery capacity that we make sure that we have enough in our hardware to sustain us for a certain time period. So that means that the hardware will go up and down. So now we sit with a good situation with hardware, meaning that we expect less inbound shipments, not on these high levels for the foreseeable future. And of course, this will then generate cash flows for us as we deliver them continuously to our customers. So I hope that answered the question. Otherwise, say as John will come with more detailed follow-up questions, and we'll try to answer that.

[Kate Linwood, executive]

Yes. Following along here, so we can pick up any follow-up questions. So how much is your core geographical markets growing compared to your noncore markets?

[John Vestberg, executive]

And that's a question for you, David.

[David Nordstrom, executive]

Well, in the report, we don't specify our sales in any specific market. So it's hard for us to give a very clear answer to that question, but we can share some insight that -- and we concluded that to deliver more growth for Clavister, we needed to have more focus both on our customer verticals to who do we sell and how do we ensure that we have the right solutions and that we have the right expertise for those verticals. So there has been one part of the focus journey. Another one is geographical, where we have left, we no longer have sales presence, for example, in certain markets outside the EU, which we had before and assuming even in EU focusing more tightly on the Nordic market and the DACH market as primary markets. We also have quite a good presence within France, Benelux and Italy. So this is the major markets for us where we see most growth in Germany and the Nordics because that is the core focus. Outside of EU, then it depends market on different markets, but we said this is no longer a focus for us. So we don't expect these markets to deliver growth. Some of them are rather EBIT declining, which was a choice we did. Let's not try to -- the cost for delivering growth in certain markets. The value proposition for Clavister isn't strong enough. So let's generate growth where we have the best possibility to do so. So it's definitely the case that we see most growth within the Nordics and the German-speaking markets, which is also in line with our strategy.

[Kate Linwood, executive]

Okay. Thanks for elaborating on that. So [indiscernible] answered a lot of questions around base business and also the Telecom business. So we have questions for the defense, regarding defense industry. I have a few here. So let's pick a few, but I think they overlap a bit in a way as well. So I understand that it's hard to comment on future orders. But if we look at the Defense business and more specifically, the business outside of the partnership with BAE Systems, can you shed any more light on the developments and lead times with other partners, including General Dynamics. And the General Dynamics one has been asked 2 or 3 times now.

[John Vestberg, executive]

That's a very good question. So thanks for that. So I'd like to respond to that question, first, giving a bit of backdrop to why we have set up our business the way we've had, mainly focusing on a partner business. So we have in Clavister in general, regardless of business area, we have extremely few customers to whom we do direct sales. It's barely nonexisting. We rate customers such as BAE Systems and General Dynamics and others in the Defense as partners as well. They are our channel to reach the end customer in the Defense case, being the ministry of defenses and those kind of end users. The business structure that we set up -- set out to build in Defense is starting always with some kind of assignment whereby we support the partner or the end customer in some cases, to understand and to design the requirements on cybersecurity, keeping in mind that cyber is an active threat in defense, but it's also a very traditional business, a very heavy industry business. So clearly, that industry needs support from experts such as Clavister and others. So first part of our assignments with defense partners and customers typically start with some kind of consultancy service, helping them with the requirements. Following to that, we get typically invited if there is a next step type get invited to proof-of-concept, some kind of product evaluation or tech evaluation, and that is what I referred to in one of the previous slides when we have a number of ongoing tech evaluations at the moment.Following on that, we typically then enter into some kind of preseries or beta testing, if you like. And following on that, we're looking at the serious contract. This process is obviously quite timely. If we look at our process with BAE Systems specifically, we're looking at a multiyear process from the initial engagement, designing, helping with requirements until the first serial contract was signed, we looked at 4 years of lead time. Now luckily, we have a number of activities in parallel. So we're not needing to wait 4 years between each and every deal. So if we zoom in a little bit just for the sake of argument on BAE Systems as we stand, we're now part of all the modern CV90 deliveries that BAE Systems have won in the recent years, and that includes 4 end customer nations in Europe, which means that our work so far has beared fruits being that we've gotten designed in. We've become an integrated part of the infantry fighting vehicles that BAE Systems are building, which, of course, increases the likelihood for us being part of upcoming projects and upcoming contracts as well. This is the same type of characteristics we're trying to build in other partners with other vehicle producers outside of BAE Systems. And those include not only General Dynamics, those includes a number of other partners that we have highlighted in previous reports and previous presentations, partners such as SaaB such as MBDA, such as Milrem Robotics, for instance. And we have come various far -- or we have come not as far as we've come in BAE Systems, but in some cases, we are in serious deliveries already, but with partners that we can't name for classified reasons. In some situations, we have reached to the point where we are part of a design win. We're moving now into the actual serious deliveries, contract negotiations. One of those partners would be General Dynamics, where we announced last year, last summer, that we were part of the GVA vehicle architecture, the new electronic vehicle architecture from General Dynamics. And that means that they had pointed out at that time Clavister could be their choice of cybersecurity supplier. Obviously, from that point, then there is a number of ongoing vehicle programs running in Europe than elsewhere, where General Dynamics are building vehicles. They are in the design phase for the new generation of those vehicles, and we're slowly but surely moving into concrete discussions on those programs. So I think the key message here is that we are moving into several partners, several vendors of several vehicles. We're creating anchor points with them using different methods such as being part of the design work and requirements work and slowly but surely we start seeing concrete programs coming out of them. But the key message is time. It takes time. But I think the important thing is we have as of current, not only having one project with BAE Systems, we have 4 nations. And we do not only have BAE Systems as paying customers. We have several other -- or we have other defense customers as well.Quite a lengthy answer.

[Kate Linwood, executive]

Yes. Thanks for that, John. Coming back to BAE and the CV90 contract, we've recently seen in the news that around defense in Denmark regarding BAE providing upgrades to the [indiscernible] CV90. So why haven't we seen any traction for Clavister regarding that contract so far?

[John Vestberg, executive]

Again, coming back to time. So the ones who followed us for a while knew that from the point where BAE Systems announced their win with 2 countries in Eastern Europe, it took exactly 1 year for their subcontractors to receive orders and contracts in turn. We can't say that the time in this case would be that long. We can't even state in a forum like this that it's granted that we will have that contract. But again, we are part of all 4 nations, modern nations with modern infantry fighting vehicles from BAE Systems. So the likelihood is very high that we will be part also of the upcoming contracts. But again, respect for the time.

[Kate Linwood, executive]

Okay. Yes. So we have a few more finance-related questions. So your -- David, these are probably coming in for you. How should we view the OpEx and CapEx levels coming quarters? Do you have needs that require new recruits that could result in an incremental increase in OpEx? Or how should you view the cost control in the short term?

[David Nordstrom, executive]

I think we're for quite some -- I mean, it's a good question. But I think from quite some time now has been unable to demonstrate that we can keep our OpEx under control and scale our business and generate more sales. We don't see that we have big gaps within our technology platform that will require us to significantly go out and hire more developers, for example. So we don't see that. So our focus here is let's maintain a strict view on our cost base, do a selected few investments if you think they are motivated that they will be able to capture more growth for us, for example, But we don't -- we -- as we said before in this presentation and in the report as well, we maintain a strict view on OpEx for this year. So our main focus is to generate more growth from the cost base we already have. But of course, this is something to monitor and see, would growth continue to pick up, and we see that to generate future growth and to able to capitalize on that, if investments would support that and would be justified, let's have a look at that, but we don't see that at this point.

[Kate Linwood, executive]

Okay. We do also have a question in the report, other -- and other external costs have decreased significantly, what's the driver behind this?

[David Nordstrom, executive]

Yes. I mean if you then would be looking at staff cost, you see that they in turn have increased. So when we set out on the cost optimization program, we used external consultants to load balance the needs within the organization. And as that has been stabilized, we have been transforming more costly consultants to more -- less costly own employees. And of course, it's preferable to build a team that consists mainly of our own staff rather than external consultants. So that is -- that transition from consultants to own staff that explains those changes within both external costs, but also staff expenditures.

[Kate Linwood, executive]

Now, when do you think we'll have a positive net profit?

[David Nordstrom, executive]

I think a -- a little bit hard to give an exact date for that. But if we zoom in a bit and gave -- I'll try to give us a straight answer to that question, again, going back to the strategy and the long-term plan, we said that 2023 would be our first EBITDA positive year. We achieved that. Then the natural next steps for that is reaching EBIT positive and then net sales positive. And I would say that we -- net sales is sorry --

[John Vestberg, executive]

Net profit.

[David Nordstrom, executive]

Sorry, net profit would, of course, then be in, not in this year, but a potential target for next year to get that.

[Kate Linwood, executive]

Yes. So in combination with that, we've got some questions around ARR. So are you satisfied with the ARR growth? And this is the ARR growth level that we can expect in the future?

[David Nordstrom, executive]

I mean, John, you feel free to pitch in. But I think satisfied is a dangerous word. So I wouldn't use that and say that we're satisfied with 15% growth. I think we're coming from a situation where we saw quite low growth in our recurring revenues, that has changed, and we are on a much stabilized trend in growing our recurring revenues. But of course, our ambition is to be above 15%. So the trend is there. As it has been with net sales for some time, then it's about tilting that trend curve continuously upwards, and that's, of course, the target. And that will come from several sources, of course, more contracts is the most important factor. And I think the focus journey we have been running in parallel with this, an increased verticalization of the company, focusing on certain markets and mending our offerings to make sure that they are on par with what is expected within these fields, building partnerships with those who are able to sell and scale the Clavister offerings. And all these things are important. But of course, when we reach the levels where we would go out and say, we're satisfied. Knowing ourselves, I don't think we will ever say that we're satisfied because at that point, you tend to lose focus and drive, but we strive for higher levels of course, than 15%. But it's -- again, it's a part of a journey where we can see that we're progressing on that journey. But of course, we're going to reach further than we have so far, of course.

[Kate Linwood, executive]

Yes. So we got the question around cash flow. In regards to free cash flow, what should we expect in terms of working capital development in coming quarters?

[David Nordstrom, executive]

I mean working capital, if -- in this quarter, we had some large inbound shipments to the inventory. Of course, that has a short-term negative impact on cash flows in the quarter where we pay for that hardware. We did that in Q1. There's a large amount of appliances. This will fuel sales in coming quarters where they will have a positive cash flow contribution. There will, of course, be inbound deliveries to the inventory also throughout this year, but not on these large levels. It will be significantly smaller. So it will not have that big effect. So that impact will be rather positive in coming quarters. Then we saw quite a decrease in working capital debt in this quarter. We don't see that, that trend would continue in Q2, but rather now we go into Q2 with lower levels of short-term debt. So that shouldn't drop further. And we have been buying quite a lot of cash in accounts payable, which will be translated into payments. So I would expect working capital changes to be positive in Q2 given what we see at this point.

[Kate Linwood, executive]

Okay. Regarding the rights issue earlier this year, what will we do with the large amount of money we have from the right tissue?

[David Nordstrom, executive]

Well, we -- going back to what did we say during the rights issue, we said that -- this will be used for -- I mean, as we have seen also in this presentation, Clavister is on a journey to a cash flow positive operations. We're not there yet. So of course, parts of this will be used to sustain Clavister until we are at that point. So that's a smaller part, but still a part of the rights issue. Then we sit with a large debt to the European Investment Bank, we also used the possibility to defer tax payments during the post pandemic support that was given to enterprise, meaning that there are -- there is debt in the balance sheet. So parts of this will also then be used to reduce our debt levels going forward. And then, of course, as we secure new repayments plans with our biggest lender, the European Investment Bank, EIB. We see that we are over -- we sit with a good cash position in relation to what are our obligations under the repayment plan that we're in. So of course, a potential use of cash is also to do potential voluntary prepayments of the EIB loan, but that's something we will need to get back on. And then, of course, just adding to that, we sit with the 2 option tranches, 8 and 9 from the rights issue, the units issue, and they will strike in September this year and March next year, adding additional cash to Clavister. And what we have been saying then in the prospectus was that all cash coming from -- all the net proceeds coming from that will be used to make voluntary prepayments to the EIB loan and pushing that downwards and making the balance sheet more manageable. So I hope that answers that question.

[Kate Linwood, executive]

Okay. Yes. Thanks for sharing those insights. We have one more question they are changing the world a bit of going into subscription models and the value that we gain out of that. So how much is the value for Clavister increasing when a Next-Generation Firewall customer goes from the old subscription model to the new model? And how many of your customers are left on the old model.

[John Vestberg, executive]

Yes. I can pick up on that one and David can complement. So when we simulated our customer stock before we introduced a new subscription-based model, we realized that most of our customers, they sit with the Clavister products for an extensive period of time in many cases, 7 years, some cases even longer. But the previous business model only gave Clavister value for the initial sales, of course, and voluntarily for support contracts for a limited period of time. So our assumption after doing the simulation was that if we move to a subscription-based model, we should be able to increase our total customer value or total contract value for a typical customer at around 40%. So 40% additional value coming from each customer. It's, of course, simulation, but that's what our stats points towards. With regards to how many customers are left on the old model, not entirely updated on that one, but I would say, still a bit around half of our customer stock is still running on old model, and they are subsequently moved. It's part of the effort being run by our partners and our sales teams to slowly but surely move all our customers over to the new model. We know that, that clearly helps, of course, ARR growth and other metrics for us. But it's also an activity that needs to be balanced towards other new sales activities to drive other types of growth.

[David Nordstrom, executive]

Yes. I can add. I mean it's a good answer. I can add 2 things. By end of the year, I would say that at least 2/3 of the contract stock, we can expect that to be migrated to the new offering. And I think there is all -- maybe to a certain degree, a soft value from migrating from an old to the new business model. The old one was opt in, meaning that we spent lots of resources, renewing customers that want to be a Clavister customer, but you need to renew all of them manually. And since we have many contracts that means there's quite a lot of effort was directed into renewing customers rather than selling or upselling to new or existing customers. While as in the new model, they are on a -- that's an opt-out model, meaning that you will stay on as a customer, you will receive -- you will have your license until the say you no longer want it, meaning that we don't spend sales resources on manually renewing contracts. So that effort is continuously dropping, meaning that we can shift more and more resources into new sells and upsells instead. So that's very important also and it was one of the reasons for making this transition. And also very important is in the newer business model, if you're no longer a paying customer, the firewall stops. The other one had perpetual elements in it, meaning that we had a certain degree of revenue leakage since you could still use the firewall even though you did not pay for it. That is no longer possible, meaning that we are protecting our revenues much, much better than we did before. And as that transition continues, that effect also will increase over time.

[Kate Linwood, executive]

So yes, thank you very much to the audience for all these questions today. That's really valuable for us also to be able to dive into diverse topics and really answer the questions that are pressing for you. So yes, thank you -- thank you for that. That means I have just 2 questions for you too then. And so John, what are you most proud of from the last quarter?

[John Vestberg, executive]

I mean obviously, I'm super proud that we are able to show these metrics, especially in to some extent, a bit of a tough market condition. Also within tech we've seen some challenges out there. So I'm happy to see that we'll be able to both deliver growth and improve margins and reduce costs at the same time and seeing that we keep on filling up our funnel with more and more and larger and larger prospective customers. So that's what I'm most proud of.

[Kate Linwood, executive]

Right. Then David, what are your highlights from the last quarter?

[David Nordstrom, executive]

Yes, I think more or less a copy of what Jan said. But I mean, we have been sticking to our plan that we set out quite a long time ago, delivering on that, transitioning the business to what we believe is more favorable terms, and we see that we can generate growth and keep our costs under control. So we continue to do more with what we have. So we can scale the company better, and I think that's something I'd like to highlight.

[Kate Linwood, executive]

Yes. Okay, yes. And thanks to you, John and David for the presentation and for answering all the questions. And thank you to our audience for attending today's session. This session has been recorded, so you can also find the recording on our website after -- shortly. So yes, have a great day, and thanks to you all.