Clavister Holding AB

STO:CLAV

Earnings Call Transcript 2021-Q2

[Jenny Ramkrans, Chief of Staff]

Welcome back to our Q2 2021 interim report. I am Jenny Ramkrans. And with me today, I have John Vestberg, our CEO; and our CFO, David Nordstrom. We'll start the presentation. First -- after the presentation, you will be given the opportunity to ask John and David questions. You can add them to the set or in the Q&A or preferably raise your hand, and you will be able to ask the questions on your own. Please go ahead, John.

[John Vestberg, Co]

Absolutely. Thank you, Jenny. Again, welcome, everyone. This is our Q2 interim report. A key takeaway from our second quarter, in my opinion, is the positive development of actually several metrics, especially our order intake of course, but also recurring revenue and our operational cash flow. We arrived at an order intake in the quarter of SEK 85 million with corresponsive growth of 55% compared to last year. This is also the highest order intake ever in a single quarter in Clavister's history. There are a number of contributing factors to this order intake. One being the first commercial end customer project within the Defense segment, this -- Q1. But also the fact that our so called regular run rate business is continuing to develop and provides a stable order intake as well for us. We saw quite a good inflow of professional services assignments or engagements in the quarter, and those are mainly related to rollout of 5G Security that we have been sold -- has been selling earlier, and as well assignment in the Defense segment. With that all together, we arrived at an order book balance for the end of the quarter at SEK 83 million. So this is a sizable increase from same period last year year-over-year, SEK 56 million. Moving on to our net sales. Adjusted for currency adjustment amounted to SEK 30 million, so a growth of 5%. And in the period, we were also able to demonstrate an all-time high recurring revenue, which is absolutely in line with the strategic direction and something that we will touch more upon later in the presentation. Our high order intake relates to larger customer engagements, as you know, and as we've seen. And this is obviously something that is within our strategic direction and something we're striving for. But as a consequence of larger customer engagement also lower conversion rate between order intake and net sales. So that's one of the reasons why we're able to see a high order intake, but not as high net debt growth. There's -- we're lagging. We have also concluded that the inflow professional services engagement is, of course, very positive. It's something that drives customer stickiness, it drives upsell and cross-sell to existing customers as well. We need to scale our delivery capacity within professional services to be able to cater for that increased demand. And that is also one of the reasons why we are adding to our backlog. We are only but surely delivering professional services execution from that backlog as we are growing our team as well building our delivery capacity.Our EBITDA improved from minus SEK 7.9 million last year, last year's second quarter to minus SEK 4.8 million this year. So it was obviously impacted positively by our improved gross profit and slightly negative impaired still but by a controlled increase of OpEx. And finally, our operating cash flow and this is something David will touch more upon. And this part was positive, SEK 9.4 million in the quarter, quite in line with last year's second quarter as well. Moving ahead to some of the highlights, we would like to rate in the quarter. We saw quite good momentum in the service provider space, service providers being 1 of our 3 vertical. A few examples. We were, for instance, able to close -- win a SEK 6 million deal with a global service provider and this deal pertain to our Secure SD-WAN solution. The rollout is starting already now with quarter 3. And it covers several thousand sites, which in our opinion negative rollout a candidate to be really one of the world, if not the world's largest SD-WAN deployment. So this is absolutely a lighthouse win for our Secure SD-WAN solution. Secondly, some year back, we announced a partnership with Telcos Systems part of the BATM Group. Telco systems provide carrier product and software product to the operator industry and the first provider space. In just recently or short after the second quarter ended, they announced there Edgility solution. And this is an SD-WAN package/universal CPE package, which is based upon Clavister software. Clavister software is one of the core components embedded in the solution. Telco Systems, as they partner to Clavister or targeting the global carriers solution. And what makes these solutions pick out is really the possibility or the ability for carriers to provide, first of all, carrier grade or premium-based connectivity solution with Telco systems bring with their own software. And on top of that, the Class A type of firewall and security features that Clavister brings. But all in all, this allows carriers to provide premium solution, premium product, at a very cost-efficient price.This actual solutions can be read upon as well on our website. And if you're interested as well, ecosystems as quite expensive product material where they also highlight Clavister as a brand in this. So we are building upon our awareness as well together with Telco Systems. At the end of June, we held our Annual Capital Markets Day, this time a virtual event, obviously, for known reason. In this Capital Markets Day, we updated or presented our refined strategic direction. We presented 5 key pillars as part of our growth strategy. With our industrial focus as one of the core pillars, our new Clavister SASE solutions, Secure Access Service Edge solution being the second one. Our transition from a product company into a value-adding solutions company being the third one. And as we will talk more about soon, our important transition towards a recurring revenue-based business. And finally, seeing that our growth might as well be benefiting from having strategic acquisition that we are looking at from time to time. So all in all, 5 pillars that are relevant to drive our growth agenda. I will touch upon just a few of those or two of those and one being the industry focus. As a small company, obviously, we need to pick our battles. We need to build momentum and critical mass in areas where we have larger possibilities or higher possibilities to win. Obviously, our key competitors, as most of you know, are large American incumbent vendors. And we need to pick our battles. So we have over a period of time in running a focused journey or been on a focused hub. Sequentially, we have decided to focus even more on a few key industry where Clavister has a stronger position and stronger ability to trade growth. And those 3 and focusing mainly then from the second half of this year, focusing on these 3 industries, public administration customers, primarily within the European Union. We have already quite a good and solid base of public administration customers, ranging from municipalities and regions to state owned companies. And this is something we would like to build upon. Of course, the geopolitical tension and the increased awareness of cybersecurity origin is a strong contributing factor to this division. Second one, service providers, we've touched upon this, including mobile operators, including our 5G security solution, but also the Internet service providers and the managed security service providers, all of them sharing the same need to drive security to their customers. And the third and final one, defense, which is vertical, we have been working with for a while. But with the recent wins, especially with BAE Systems, we have decided to focus even more on this segment. We are introducing a new solution in the second half of 2021, and that is our Secure Access Service Edge solution or short SASE. This is a solution that basically builds on all the software of IPR or all the software that Clavister's been building over the past 20 years. This is in good contract, I would say, a positive contrast in many of the upcoming other SASE vendors in the world, where they are mainly acting -- there are exceptions, of course, but many of them are acting as system integrators. They pick third-party component, build a SASE framework, deliver that from cloud vendors or cloud platforms to various groups of customers. The difference Clavister has here is that we own the majority of the SASE technologies already. So that means that we can leverage on that. We can create a flexible OEM and licensing agreement. And of course, it drives high margin for us. In essence, what SASE is basically the convergence between various wide area networking technologies and security components. And all of this is predominantly delivered from the cloud. We have been working with this solution for quite some time, and we have onboarded our first data customers already. As mentioned, in H2, we are launching with our first commercial customer. This is a market that is expected to grow very quickly, and it's expected to take on quite a lot of enterprise attention over the years to come. One of the key reasons for this is obviously the pandemic. Even though the market was heading in this direction before 2020, the pandemic fueled some extra injection into this direction, reason being that the SASE type of solutions they take before so many more complex rollouts and many more complex security scenarios than what the traditional securities solutions from various vendors have done in the past. So cloud based obviously means that we are catering from work from home users, work from anywhere type of scenarios, but also from regular offices and smaller sites. So a very comprehensive solution. Very complex, obviously, behind the cartons from the user perspective, much more straightforward than the traditional way of deploying security. Again, just reiterating what I just mentioned, the IPR advantage we have as a company with us owning the majority of the technology side, some areas which we need to source from third parties and some areas which we, over time, will be looking at either developing ourselves or potentially through acquisition.The important change to our business model is something that we start seeing impact on already, but the formal and the big official belief or launch of our new model is the 1st of October. We have historically been having quite a mix of different business and license models. Most of our products have been sold on a perpetual onetime fee model with some additional support subscriptions on top of that. However, as you know, as a software company that has to drive shareholder value, the most important factor and the most important metric that we need to drive is annual recurring revenue. And to do this, we decided earlier this year to implement or introduce a new business model that will basically consolidate the majority of all of our current models into one single model. And that is a firm base or sometimes called as a service-based model with permanently recurring revenue. There will be smaller components being one-off, but we are shifting the majority -- the vast majority of the total contract value from our customers, we're shifting them from perpetual to recurring. A number of benefits, of course, to Clavister and of course to our customers. First and foremost, it gives us much higher predictability. It gives us much more visibility into our revenue stream. We strongly believe that we -- although we already have good retention rate, but we believe that we can reduce the churn even further because of this step-up and the structure as such. We have auto renewal functionalities in this model, which allows us to spend less sales resources, less sales effort, into convincing customers to continue with us. Rather, we can spend time on attracting new logos and new business. And finally, because we're shifting from CapEx to OpEx for our customers, it means a lower upfront investment. And as such, we believe it will reduce the threshold or lower the threshold to join Clavister's customer. It should all come with good benefits and good effect. As all of you know, we're changing from a perpetual model to a recurring revenue model, there is, of course, a short-term impact. And this impact is primarily then, of course, on net sales and consequently on EBITDA, whereas our order intake, the total contract values will not change dramatically. We expect them to be more or less the same. We have historically been starting this journey already a few years back. But by then, it was more looking at the type of services we were selling, trying to move the product mix in a way that would support recurring revenue. This has been successful so far and especially now with the second quarter where we recorded 74% of recurring revenue is absolutely a good transition. But we strongly believe that the new model will cement and even further improve this transition on this type of ratio. With that, I'm handing over the word to David to give some more in-depth on our financials.

[David Nordstrom, Chief Financial Officer]

Thank you, John. So looking at the financials in the quarter, starting with order intake, that's, of course, are a record high order intake for Clavister, the highest order intake in a quarter yet. I'm trying to not repeat what John has just said, but just emphasize a couple of the items here. And order intake in the quarter is primarily driven by larger accounts, an inflow of larger deals in defense, of course, with the large order from BAE, but also good inflow in the service provider space, both in securing offices and also in the 5G space. So it's a good mix of larger orders in this period. But then, of course, if it relates to larger accounts, the delivery times of many of these orders are quite long. So it's good. We're securing top line support for Clavister for a long period to come, because an -- Clavister is one part in making these deliveries in large complex deliveries, the defense contract is one good example. I mean the project to the end customer, the Clavister part is only one piece of that, and Clavister cannot influence the time line of the total project as we have one delivery out of many. That said, we are working with the backlog and the part that we can control to ramp up our deliveries in the near future to have good support for net sales. So these are ongoing projects internally to ensure that we here as much resources as possible, for example, to our professional services team to have a order intake here have grown quite rapidly during Q1 and Q2. There is also a need for us to ramp up the team to deliver on a good order intake here, especially within the Telco area, which is a very positive thing. Looking at our net sales. I mean we have an increase of FX adjusted net sales of 5%. And in the -- if we execute the FX effect our growth is 4%. So we're seeing smaller FX effect in this quarter than we have been in the previous quarter. So that's the net sales growth we're having in this quarter. And I think a very good thing here, which John also mentioned is the highest recurring revenue elements so far in our history, which is -- I mean that's part of our strategy to grow the recurring revenue element that we believe that this gives predictable revenue over time. It's beneficial for Clavister and it's beneficial for shareholders, and to further support the recurring revenue element. That is the reason why we are introducing new business models. We need new types of bundling for packages and also a new type of pricing structure that will be fully term-based, and that introduced the second half of this year. So this is something we believe will support a high recurring revenue percentage and possibly also fueling it even further. Looking at the gross margin, we are maintaining or even increasing a good gross margin of now 85.3%. We're very proud of that. We are growing our net sales in the quarter, but maintaining COGS at the same level. And I think it's worth mentioning a couple of initiatives that's been running for quite some time in order to capture good margins in our sales. And that is we have -- we own, of course, a lot of our tech stack, so adding new sales, new top line does not come with additional costs. That is one important -- it is the important factor. The second one is our work to renegotiate contracts with our third-party license providers to flat fee. So additional growth does not come with additional costs, but it's also one important contributor. And the third factor and that is last year, we bought IPRs for roughly SEK 20 million. So instead of paying for using third-party content, we own that content now, which means that adding growth does not come with an added cost. So these are important elements in maintaining and growing a good gross margin. So these are the main reasons why we can grow our gross profit from 83.7% to 85.3%, which we believe is a strong number. And this is in line with the trend that's been seeing for several quarters. Looking at OpEx we have a controlled OpEx growth in the quarter. It's driven by a couple of things. We're looking at the main drivers is investment in go-to-market, to make sure that we can sell the solutions that we're having. But one important element, of course, is we are introducing a SASE solution to market, we need, of course, to invest in that solution. And as we are progressing, not all of our costs are capitalized in the balance sheet. So this is the introduction of a new solution having an impact, not only on capitalized expenditures but also on cost. So this is what we're seeing here. And then I think we have a good cooperation in Clavister between our product team, our commercial department and our tech team who are building and developing solutions. And that we can -- there, we can see what gaps do we have, which are important to cover in order to be successful in selling any solutions, refining them and taking them to market. And we have ramped up a couple of investments to fill small but important gaps in the ports these are functionalities that we need. So these are functional assets need to improve. And we have used also to a certain degree, external consultants to not disturb our road map of product development to ensure that these -- that we don't have hurdles when we go to market. And these are also impacting costs to a certain degree in the quarter.Then I think a very important and good thing that happened in this quarter. As you know, we closed the office in Umeå back in 2019, and seize operations there in order to focus our tech investments more and have a higher cost control. However, we were sitting with an office lease and an office that we did not do. And COVID, of course, was not helpful in negotiating and a release from that, obviously, since demand for offices, of course, have gone down. But we're working hard with that and reach a, what we believe, is a very good solution with the landlord where we could close that Office, close the contract with the cost significantly lower than what we had reserved in our balance sheet to have a positive impact of SEK 2.8 million in our OpEx for closing that office. So I think that was very good. But then adjusting for that, of course, is a positive impact of OpEx. So OpEx is then SEK 45 million in the quarter. And the increase is driven by what I stated here and mentioned. Looking at financial items. The majority here is, as you know, they are mostly noncash as it relates to cost for antidilution works for our lender EAB and also long-term interest to lenders with no cash impact in the quarter. So the financial side the cash impact is SEK 0.9 million, which is the same as they were a year ago. So it's really there in the items with the cash impact. Over to a couple of comments on balance sheet and cash flow. So we see an increase in CapEx. And as said, I mean, that is the primarily explanation to that is investment in the asset solution and also the accelerated development efforts also mentioned in the slide before, we cover some gaps in our portfolio needed to successfully sell a couple of solutions. So that's what we have been doing here and explaining the increase in CapEx. Amortizations, I mean they are exactly on par with you to last year. So I'm not going to elaborate any more in that. One important thing here is that we're seeing and something that we've seen for some time. improved cash flows in operations before working capital changes. And that is improved leverage in our operations where the cash burn is reducing as we are being more profitability in the underlying business. I think that is important to see that that metric is moving in the right direction. And then looking at cash flow from operating activities after working capital fees. I mean as we said in Q1, in Q1, we had a lot of onetime effects impacting cash flows negatively. We were -- it was cost for fees related to the capital raise. And also seasonality effect for buildup in debt in Q4 paid in Q1. And we said that, that is a onetime effect in Q1, we will not see that repeat in Q2. And I can then conclude that, that is also the case. Cash flows after working capital changes are on the same level as last year. And we have a good trajectory in account receivables, which have developed were nice from a cash flow perspective and then offset with with repayments of COVID support. As we stated in Q1, that the last COVID support we received would be repaid in Q2 with roughly SEK 4 million. That's what we have done and that have impacted cash flows in this period. All in all, that leads to the gain in cash position of minus SEK 3 million in the quarter, which is quite in line with what the cash impact was in the corresponding quarter last year. Looking at FTEs, they are on par with the loss in quarter last year. It's an increase with [indiscernible]. However, there is a change of mix in FTE, of course, during the course of the year, where we have a good recruitment in several areas of the company, both in go-to-market and impact in line with the strategy that we're having. So these were the -- to summarize my comments on the P&L, balance sheet and cash flow. So I think from my part, if you don't have any concluding remarks, John, we could move to Q&A.

[Jenny Ramkrans, Chief of Staff]

[Operator Instructions] Let's start from I will to a [Indiscernible].

[John Vestberg, Co]

So we have -- No, we have one question regarding the OpEx development. I think, David, answered up to that extent. I could just reinforce or these dates, but the OpEx development is something that we keep a very, very close eye on, obviously, cost control has been a mantra for us over the past 3 years. We need and this is something we conveyed in the Capital Markets Day and prior to that, there are certain selective go-to-market investment and selective tech investment we need to do the investment in our Secure Access Service Edge solution is one and selected headcount additions to go-to-market is another. You might have seen recently that we have announced some additions to our team, one being a new space leadership with Mats Wenner prior -- from Nokia. That joined Clavister quite recently and will have our sales as global -- Senior Vice President of Global Sales. Another example is Camilla Törnblom, who recently joined as our new Marketing Director, Camilla has a background from leading marketing in Intel and with the American company FLIR and [Indiscernible]. With that, we have also expanded our product marketing capabilities with 2 new members to the product marketing team. So we're doing that in an orchestrated effort to build upon our go-to-market capabilities, our marketing or external communication areas, we know that we need to improve to drive growth. But obviously, those are saying that it comes with it like cost.

[Jenny Ramkrans, Chief of Staff]

The question coming in, should we expect the R&D-related costs to come down a bit after the business is fully launched?

[David Nordstrom, Chief Financial Officer]

I think it depends what you mean also we fully launched. I would say it's a staged approach where we are launching and taking the SASE solutions to market. The SASE is a new concept that we want to fill with so much content and meaning as possible to have a very competitive solution. So I would say we are anticipating that this is something that we will invest continuously over time. So you see a a drop in investment in R&D in the near future. I would not continue to take that. but not very large ramp-ups either. I hope that answers that.

[Jenny Ramkrans, Chief of Staff]

We saw sales of products and [Indiscernible] this affect is temporary or going forward?.

[David Nordstrom, Chief Financial Officer]

I would say there's a trend here that if you look at the trend picture that John showed in his presentation, you see that the recurring revenue element has been constantly growing over time. And then there's also, of course, the question how large can that component be? And that depends, of course -- in a quarter, it depends on mix, or we're selling what types of licenses are we selling. So it's strong number in Q2 is absolutely due to a strategic work with increasing recurring revenue. But of course, it's partly driven by mix, which is but entirely under our control. So it depends also that big contracts we win in a period and so forth. And looking then further, we believe that this is a level that we can maintain or even grow as we introduce new types of business model in the second half of the year. But then, of course, it depends on in according -- for example, looking at the BAE contract, which sits in our order book, which is very big. Importers where we have very big deliveries to be sent. That will impact recurring revenues as that is hardware heavy and also perpetual. So it depends. We will have mix factors going forward. So this number will not be entirely stable over time because they will differ between periods. But the trend, I would say, is strongly positive. John, do you want to add?

[John Vestberg, Co]

I can only add one thing, and that is sort of if you would ask us volumes are desired than a mix where we -- in the ideal world, and this is a hypothetical scenario, but our desired state would be that 85% to 90% of our revenues are recurring, our perpetual product sale and the rest is professional services. We need and we want rather that professional service because it creates customer relationships, it creates stickiness. It drives upsell and cross-sell and all of that. But all the rest -- all the majority of the revenues should preferably be recurring. That's what drives shareholder value for Clavister. Reality is exactly what David said, it will be a mix. There will be deliveries and products that could be sold on perpetual mode still. But driving in recurring revenues, absolutely are steady.

[David Nordstrom, Chief Financial Officer]

Yes, I fully agree.

[Jenny Ramkrans, Chief of Staff]

In 5G area. How is the cooperation with Nokia going, describes this as default solution in the security?

[John Vestberg, Co]

The answer is yes. That was -- if you look at the so-called blueprint designs from Nokia, where you define how a 5G core network is being built than Clavister product goes -- is designed in as a blueprint component by default in Nokia. So answer is yes.

[Jenny Ramkrans, Chief of Staff]

Further questions, how many operators that have signed in agreements and still agreements have [Indiscernible] do not end commercial base in retail?

[John Vestberg, Co]

So far, if we look at -- we have been deploying or selling roughly 30 -- in magnitude of 30 mobile operators so far. And out of those, I believe that maybe 10% to 15% has decided not to expand or not to move further, at least at that time for various reasons. And that is sort of an attrition rate or churn rate rather that can be expected. It is worth highlighting those few things for a couple of things, but that does not mean that we will have any cancellation of orders. All the orders we have received from those operators have been fulfilled or are being fulfilled and delivered on. So an operator that decides not to continue, will not mean any financial impact for Clavister in our numbers. The second point, we're highlighting is that we sell our 5G secure solution through partners, such as Nokia such as Ericsson. That means, as a consequence of that, that we are, to some extent, on an arm-length distance from the operator. We are doing a lot of activities to reduce that distance and to build with closer relationships with the operators directly. We need to do that for controlling our business. We want to do that to strengthen our possibilities to do upsell. So coming back again to the order intake from professional services, we are encouraging our partners and we are encouraging the mobile operators to take help from Clavister, from our professional services regardless if there are other consultants available from our partners because at the end, we know our solutions by heart. And we can secure the solutions from a quality perspective. And of course, drives a much closer rebate. So going forward, we hope to arrive at a situation where even though we do transactions and we sell new partners, but where our relationship is much, much tighter with the operator. That will also enable us to minimize churn and to support operators and reduce the numbers to decide not to proceed with.

[Jenny Ramkrans, Chief of Staff]

Can you please also comment on the pricing of the market as the recent cyber threat has created a stronger demand with more pricing power?

[John Vestberg, Co]

Complex question, but well into it. I mean, clearly, the new attacks or the recent attacks they place so much more attention on this cyber threat problem. So it absolutely drives demand on a general level. Of course, we will not be able to speed up from 1 week to another, a momentum that's being built over time. With increased awareness with increased demand, of course, that drives or reduce this price pressure, that's quite common, that's fair. The other component in this, and that has been a fact for many, many years. Cybersecurity is constantly evolving, which means that any vendor, including Clavister -- and it relates to David's answer regarding R&D cost as well. Any vendor need to constantly update their solution add more mitigation capabilities, more threat protections with mitigation capabilities. And of course, that adds value to the product and with value comes a higher price tag. So that higher price tag would be the value creation that happened in the solution is an expected mitigation tool to avoid price erosion as well. So that's why we've been seeing quite steady prices in cybersecurity over the years. And I don't see any change to that. On the opposite, increased demand will probably push investment, rather increased investments in publicity we can push prices.

[David Nordstrom, Chief Financial Officer]

Yes. And to add to that, I mean, I think we are in a market where we feel that we have the ability to also change our pricing introduced a new table pricing in H2, which is term based. It's a driver recurring revenues. And I think we have -- that is also an answer to the question. We have a provider type cybersecurity services, have a certain power to actually define how prices can look in this market. I think that is also a very positive thing. We are not in a market who decides how to price for us, in fact we can decide what is beneficial to us and introduce such changes, which is beneficial to Clavister in the long-run.

[Sam Coleman, Director of Marketing & Corporate Communications]

David. I would like to move into cash flow questions. Do you think the cash balance is enough for you currently? Or can we expect more tax rate a couple of years? That's been a question.

[David Nordstrom, Chief Financial Officer]

I think we have a strong cash position. We are ending the quarter with a cash balance of the SEK 100 million. We feel confident that we have a cash balance to support a change of business model from perpetual to recurring, which I mean such a change, looking at -- so just facts from others who are doing a change in a similar way to a strong business model, it has a short-term impact on cash flows. And adding to that, as I stated in my presentation previously, we have a positive trend in cash burn as it's decreasing. I mean, it's a positive trend in cash flow operation. So we feel confident with the cash position that we're ending the quarter with.

[Jenny Ramkrans, Chief of Staff]

John, [indiscernible].

[John Vestberg, Co]

I mean, obviously, we have to be satisfied and proud of the order intake that here. But I would primarily still point to the increase in recurring revenue because at the end of the day, recurring revenues will drive the shareholder value, it will drive the ability for us as seen to grow the steadily and with all the benefits that I alluded to before. So I would say that's the key takeaway for me at...

[Jenny Ramkrans, Chief of Staff]

What will give you a growth level of 5%?

[John Vestberg, Co]

I think we've touched on that already that we've seen now clearly that even though we have a very high order intake and high order intake growth, given that a lot of that order intake related to large customer engagement. And we have a slower -- for obvious reasons, natural reasons, lower conversion rate between order intake and net sales or revenue from those engagements than we get this lag or the deficit in growth. With all the -- first of all, with having that strong order backlog we have means that it is a good foundation for fueling upcoming net sales in period, of course. But also, as we discussed on what David talked about all the incremental improvement we have been doing to support even more order growth and even more net sales arriving from that is something that we would really want to push for. Add to that, the change to recurring revenue model, add to that the stronger growth market, add to that solution, solutions that are being taken to market. So I think we have a lot of things to look forward to in that prespective.

[Jenny Ramkrans, Chief of Staff]

Actually, we have [indiscernible]. You have a new question.

[Unknown Analyst]

I'd like to ask how you view the cost picture for the different -- you could say the different parts of the costs going forward, your outlook like growing personnel costs and so on.

[John Vestberg, Co]

David, would you like to..

[David Nordstrom, Chief Financial Officer]

I think that is very good and it's a very important question. For us, I mean, cost control is very important. -- but not to the extent where we hurt the business. I mean you could always reduce cost very much, but then it will have adverse effect on product development or on sales. So I think if you need to find a balance there as a small company, that's what we're trying to do. So what we have very, very clear tasks to our organization. So where we have the biggest cost, the biggest part of costs are either sales-related or development-related. So let's talk about those. So when we talk about tech, it's a very clear part on what do we need to develop? What do we need to build in order to fuel our growth. I think we have a good control and a good knowledge there, what we need to do. Then is on sales. I mean we have onboarded new sales leadership, as John mentioned, started mid-August. We have very clear thoughts of the deliveries that need to be made and paired that discussion and also with, of course, a resource discussion. If we reach this level, then we can add more. If we reach this time zone, we can add more. I think it's a controlled growth with controlled costs related to that growth. So I think -- I hope that answers your question. John, do you want to add anything more to that?

[John Vestberg, Co]

I mean looking at the type of business we are, the type of organization, we are personnel costs will always be the the maturity of our costs. And what David mentioned before as well, that we are able to increase our revenue without increasing the cost of goods. And I think that is 1 important factor that with the type of business we are. We have done a lot of improvement in our direct cost and direct sales costs or cost of goods sold. All the rest, more or less is staff cost. And we have our base platform in terms of R&D. If you watched our Capital Markets Day, you also saw that we are reinvesting nowadays, a healthy degree or a healthy part of our revenue, we're reinvesting in R&D, but that will increase -- not the ratio will not increase, but dramatically, but the the actual amount will increase as revenues grow. And those markets is the same. Those markets is, however, a bit more proactive. We need to fuel the machinery with more stuff as we grow. So long answer to a good question. Great.

[Unknown Analyst]

If I'm looking at, for example, this quarter, then I can see top line in absolute numbers has not grown as staff as personal costs some timing will we see those benefits in the future? Or are these things that have to keep on occurring every quarter?

[David Nordstrom, Chief Financial Officer]

Maybe. I think we have tried to explain the cost rationale in the quarter and also the net sales growth. Looking at -- what is our ambition is, of course, a faster net sales growth than a cost growth.

[Jenny Ramkrans, Chief of Staff]

Finally David, actually, is there is something you would like to highlight?

[David Nordstrom, Chief Financial Officer]

I think a lot of things have been highlighted already and one of my key strengths is repeating myself. So I think I will do that, but not very lengthy. I think it -- there are certain proof points in the report. And we see them repeating for several quarters now. I think they are worth mentioning. When you make a strategic decision that these are scalable parts of our operation and important proof points to our business model. One such thing is I think it's -- because I think that's something we're very proud of because it's the product of a strategic decision. We are a company that we are not going to take lots of IPRs from others package that and only be a reseller of what other people invented rather than build our tech portfolio ourselves. It takes time, but it is very scalable because when you have it, it scales, you can add sales without adding cost. And then looking at, -- okay, there are certain pieces that is important, but it's not our core competence. So let's add those but add them with thought so that we can scale again without adding lots of costs when we grow and some things that we need to buy in order to have it, but then control it, so it can grow without adding cost. So I would say we have a a tech stack that gives us the ability to grow very profitable. So that was pure repetition of what I've said already, but I think it's important because I think it's a core part of what we are.

[Jenny Ramkrans, Chief of Staff]

Thank you, David, for the highlight. With that, I would like to thank all participants. I would like to thank John and David as well. And we will conclude this Q&A.

[John Vestberg, Co]

Thank you very much.