Clavister Holding AB

STO:CLAV

Earnings Call Transcript 2023-Q2

[Unknown Executive]

Good morning, everyone, and welcome to our Clavister Q2 Interim Report Presentation today. My name is Kate Linwood, and with me is our CEO, John Vestberg; and our CFO, David Nordstrom. So we will start today with presenting the Q2 report. And after, we will have a Q&A session. So please feel free to put your questions in the Q&A box and also raise your hand at the end of the session, if you would like to ask your questions directly. So with that, I would like to hand over to you, John, to start the presentation.

[John Vestberg, executive]

Thank you very much, Kate, and welcome, everyone, to Clavister's Q2 report. Happy to see all of you in the meeting. It will be a pleasure to guide you through the latest update from Clavister. Starting off, as usually, I'd like to just provide a summary -- rough summary of the quarter. The 3 key takeaways that I'd like to convey from our second quarter was obviously a very strong order growth, which we're super happy to report on. We continue to reduce our OpEx, our operating costs. And as a consequence of those, we see a strongly improved operational cash flow, which is obviously what we've been striving for, for a long time. Dwelling a little bit more on the actual business. So -- if you recall, we have a base business consisting over next-gen firewall products and our next-gen firewall business and our Identity and Access Management business. In both of those businesses, we saw strong trajectory in this quarter. But even more positive is that we are adding to that also trajectory and positive growth in our 5G security business. In our Defense business, one of the key takeaways or key wins from the quarter was a design win. We announced this already in the spring, with the European brands of General Dynamics European Land Systems. And I'll get back to that in a short while. Looking at the order intake, strong growth, as mentioned, we grew our order intake with 43% year-on-year. So obviously, we're super happy to see those numbers coming out. The annual recurring revenue metric, which we introduced last quarter, also saw growth with 14%. So we're happy to see that our base of software licenses keep stacking up and keep fueling revenues for future periods. In the quarter, we saw a quite strong tilt towards longer-term projects, which means that we are securing revenue generation for future periods. However, the field towards longer-term projects also means that the footprint, in terms of revenue recognition in the quarter, was a bit modest. So we growth in net sales came in at around 8%. And David will guide you through this in more detail. We spoke about OpEx, and we continue to reduce our operating costs. And this quarter, we saw a reduction of 10%. So this is obviously the consequences, the result of the strategic program that we initiated last year. All in all, this takes us to another positive EBITDA quarter, and actually a very important milestone for Clavister. This is the fourth quarter in a row, basically a full year of positive EBITDA, which we will celebrate for sure. From a cash flow perspective, this also means that we're demonstrating positive cash flow -- operational cash flow before working capital changes. If we then move on to our -- one of our base businesses, the Firewall business. On the screen, you see a nice stack of modernized Clavister products that we have been upgrading and modernizing over the past year. We've seen in the quarter, a sales growth. We've seen positive trajectory across the board in, I would say, most of the or all of the geographical regions we are present in. In terms of use cases or customer groups, the areas where we see most traction is within the so-called mission-critical applications. In other words, customers with strong demand for cybersecurity, protecting mission-critical use cases. In terms of our ambition level, however, we would like to see more. We believe that we have a product set today, which is highly competitive. We believe that we operate or we know that we operate in a very hot market. So -- and all of you has been in product sales or product in a product company knows that there is no secret recipe or no magic silver bullet to sell. The only thing we can do and we will do is to continuously fine-tune, adjust, test our ways of working until we find the reside that works best for Clavister. Nonetheless, we're demonstrating growth, but our ambitions are higher, to be clear. One of the key events in the quarter was an extension with one of our key customers, International Workplace Group or IWG. For those of you who don't know IWG, they are the biggest workplace provider in the world or managed office provider. They provide seats or workplaces for more than 8 million people or 8 million individuals across the globe. Clavister products are deployed in over 4,000 locations across the globe. And we're now extending this contract with them to a minimum value of SEK 23 million over 3 years. Another interesting customer win in the quarter on a more local or regional arena, was the Swedish Hockey League. We're working closely with a niche partner, Bluecom, that have secured an interesting deal whereby the Swedish Hockey League is deploying Clavister products in all the Swedish SHL arenas to provide cybersecurity, obviously. Moving over to our Identity and Access Management business. And I think the headline we decided for stable iron business that for expansion really gives you the summary of our IAM business. For this year and specifically for the quarter, the focus has been to really make sure that we maintain the position we have as a market leader. And I would say that the Clavister IAM business run through the subsidiary PhenixID, is really a market leader in the Nordics, specifically in Sweden. Of course, we need to grow this business as well, and we need to solidify this position and that has really been the focus for the quarter. I think we've been able to do that. We have not only been able to build growth and drive growth, but also expanding the team, building a somewhat larger sales and marketing team and the delivery team to meet the demands we're seeing from not only Swedish customers, but public sector customers across the entire Nordics. Some of the key deals in the quarter came from valued partners. So we're working with steel partners such as TietoEvry, ATEA and others, and saw quite significant deals from those type of partners in the quarter. We were also able to extend a significant deal with a -- we can't disclose the name, unfortunately, but a Swedish public agency within the financial sector, a very important reference case for us. With that said, again, the business we're running in the IAM field is mainly in Sweden or in the Nordics. What we've been building over the past 6 months is really a groundwork as well to expand the IAM business outside of Sweden. To be clear, we will be following our geographical strategy. So we focus on the Nordics. We focus on the German-speaking region. We have a partner network and a distributor network that are happy to pick up the IAM products also outside of Sweden. So we see that the investment or the marginal cost of expanding this business is slim for us, with a huge upside, given the full proprietary software IPR that Clavister holds in this area. If we then move over to our 5G Security business, again, a headline, which I think is really relevant in this area, growing business, but lumpy. If we zoom out and look at the macro perspective, there has been a slim only 7 5G stand-alone deployments in the world globally in the first half year of 2023. This is clearly below expectations from all market analysts. And our understanding is that the investment sentiment from the operators are really limited, really pushed down by the harsh financial markets currently. Nonetheless, the good point is that for us, this was a quarter that was quite good or really good from a 5G perspective. We were able to demonstrate growth. And what we keep hearing is increased pipeline and increased appetite from the operator or customers we're talking to. One of the key events from this quarter was an expansion with the work we're doing with Three UK. So this is the operator Three, one of the biggest operators in U.K. We have already a quite sizable deployment with Three UK, and what we're doing with them now is an extension and an upgrade, whereby Clavister is now commissioned to do the full upgrade of their entire security posture in their 5G network, and bringing them to the latest Clavister product version. As that product upgrade continues, we will definitely see software license orders coming along as well. So all in all, even though the sort of macro perspective on 5G is a bit bearish at the moment, we still maintain a positive outlook. And we have to accept the fact, however, that it is a lumpy business. Over to our Defense business. Robust demand generation, which I think is suitable headline as well. We did not demonstrate any significant new orders, concrete orders in the quarter, but we're seeing a very robust and a growing pipeline. With regards to our collaboration with BAE Systems, one of our primary partners in this area. We have an ongoing configuration and design project, whereby we're sort of collaborating on future platform deployments. This is a work that's been going on for a while, and it's progressing positively. Aside BAE, we then obviously won a key design win in the quarter and this was with General Dynamics, the European branch, and I'd like to provide you a little bit more details on what that means for us. So in essence, this is a journey that, in many ways, are similar to what we've been doing with BAE systems over the past years. Starting with proof of concepts, collaborations, trials, demonstrating the viability of our technology, which subsequently has moved into a more formalized collaboration, which then eventually led to the design win that we were now able to announce. What General Dynamics have made is a new vehicle architecture called NEVA. This is basically a new digitalized architecture where they fit various kind of software capabilities. It could be autonomy, remote control, communication and cybersecurity. And the positive thing, obviously, for us, is that after this long period of evaluation, they finally decided to go with Clavister for their cybersecurity posture. And if you look closely, this is how they announced the [ collaboration ]. This is one of their vehicles, where they are publicly announcing Clavister as part of their Spanish Ciberseguridad capabilities. In terms of business potential then with General Dynamics, what does it mean? Well, obviously, they are a large corporation. They have a number of platforms. There are a couple of platforms of extra importance to us right now. One of them is the ASCOD vehicle being produced in Spain. This is a family of tracked combat vehicles or infantry fighting vehicles, on the same manner the same type of vehicles as the CV90 from BAE systems or the Lynx vehicle from Rheinmetal. There are around 1,000 vehicles in operation, mainly across Spain, U.K. and Austria. One of the business opportunities at hand for Clavister would include the so-called mid-life upgrade, whereby these 1,000 vehicles from various time epochs in the past, they need upgrades. And when those upgrades happen, the new NEVA digital architecture will be implemented. So that's one of the business opportunities.

The second one is a new program that has been announced. It has been commenced by the Spanish army, to build 2,000 new vehicles to replace an existing older vehicle. This is a production that is aimed to start next year. So quite a substantial opportunity. I would like to highlight though that these are opportunities. A design win is not a contract per se. It's not a committed order. But again, following the analogy with BAE systems, we are seeing the same type of journey. The second type of vehicle in their platform is the Piranha vehicle. This is basically also an infantry fighting vehicle, but wheeled base. This one has a much larger deployment base. We're looking at 11,000 vehicles in operation in many, many countries across the globe. Some operators include Sweden and Denmark. Again, there is a mid-life upgrade opportunity for us, and there is also a new program. This program is run by a consortium, including General Dynamics, including Indra and a number of other defense contractors. The scope of that program is minimum 348, to be precise, with an upside of 1,000 vehicles. So all in all, a substantial opportunity for Clavister. I presented this slide or this picture some time ago. But given the progress we've now been having with in our Defense business, I think it's time for an update. So basically, what we're trying to convey in this picture is the way we are able to scale our business in the defense area, through the partnerships we have built and that we continue to build. So again, through a partner like BAE Systems, we have design wins, which then resulted in integration contracts with specifically the CV90 product. Then there are a number of defense programs being run by the individual countries, individual Ministry of Defenses across the globe. We have already deployed the Clavister products in the Norwegian Army and in the Dutch Army. And as you've been following media and the publications from BAE Systems, you all know that they are on a winning streak. There are many prospect contracts and many existing contracts that they have won as well. Slovakia being one, Czech Republic being one. They recently finished testing in Brazil. And I think most of you saw the news from the recent visit from Zelenskyy with the Swedish government, where BAE Systems will likely produce CV90s in Ukraine as well. So all in all, a quite massive prospect base for them. And we have, obviously, the opportunity to be part of several of those prospects. We see the same type of scalability or scaling the business then with General Dynamics. So the NEVA design is the important key there and the various prospects that would follow from that design. And again, replicating this type of business in other key defense contractors as well. That's our daily job right now. So with that, I'm happy to leave the over to David for some key metric development.

[David Nordstrom, executive]

Yes. Thank you, John. So you will be recognizing this picture from the Q1 presentation. Looking at, first, the order intake trend. As you know, we have had a declining trend for several consecutive quarters. We're very happy to break that and come up with a 43% order intake growth within Q2. And this is something that we also indicated before that the order intake trend, the decline of that, that we've seen for some time, has been mainly associated with the fact that we changed business model end of 2021, where we typically shorter contracts, but with greater net sales impact and better margins for us. And now we see that, that trend of declining order intake is stopped and order intake is again growing, which is very, very positive for us. And growth, as John has been saying, comes across the entire business. but most significantly from the IWG frame agreement, which gives 1 year of order intake for that, a 1-year order of roughly [ 8 million ], larger order within from Nokia, but stability in order intake growth in the entire Clavister Group. Net sales, the positive net sales trajectory continues. So we see a continued growth. The -- [ I'm going to accept ] that the order intake growth of 43% does not fully correlate with net sales growth. That is due to sales mix, and we'll talk a little bit more about that when we get there. Margins, on a good trend, we are growing our gross margins also in Q2. So we are having a good margin stability due to lots of software in the sales mix is the primary explanation to that. And then adjusted EBITDA on a trailing 12 months. Here, we see very clear improvements of our structured work to continuously improve our profitability. So I think this trend is very important for us, showing that we are able to grow our business and also increase our profitability while growing. Bit more of a deep dive in certain financial metrics. Starting with order intake. As I said, a growth of 43%. It is driven by underlying business growth and also attributed to 2 larger contracts with IWG and Nokia within the quarter. Net sales growth of 7.6%, and if we adjust for FX, growth is roughly 6%. And as you know, the Swedish krona has been in a downward slope for quite some time. And as we have a lot of our sales in -- it is -- SEK is a dominating currency, but lots of our sales is in euros, and a lot significant sales is also in U.S. dollars, and that has a positive impact on net sales. Then the large delta between order intake growth and net sales growth, it is related to sales mix really. One example is the Nokia contract. Very positive for us, but that rollout will start after Q2. So there is no net sales impact whatsoever from that contract in Q2, for example. But it sets a good foundation of net sales growth going forward. And we have a belief that we will be able to sell more -- also software contracts related to that order in coming periods together with Nokia. ARR grew with 14% now up at SEK 130 million, meaning that a large proportion of our sales is on an annual recurring basis, which is very important for us and in line with our strategy to grow that. Sold margins at 83.8%, a big increase from Q2 last year. Q2 last year was very hardware-intensive, as we rolled out many contracts in the new business model, and hence also delivered much of our new hardware, which was quite new at that period, so -- which had an impact on gross margins in Q2. As we talked about in Q1, we have been very successful also in Q2 in selling our new subscription-based contracts, also on old hardware platforms. So we are migrating customers to better recurring revenue contracts. They are better for customers, they're better for Clavister, and we don't have to switch hardware, which is very positive for a customer and it's very good from a margin perspective for Clavister. OpEx, we have nonrecurring costs of SEK 1 million in this -- in Q2 and SEK 3.6 million in the corresponding period. So adjusted OpEx decreased with 10%, and is related to mainly the effects of all the cost optimization program that we have been running for quite some time. So we're glad to see that we can scale the business, while also pushing our costs downwards. This translates in a EBITDA improvement of SEK 13.5 million from minus 10.1 to plus 3.4. And we have EBITDA support coming from all aspects really of the P&L. We have net sales growth. We have a good growing margins, and we keep costs under control, which has a good impact on EBITDA. And the corresponding impact, you will see that on EBIT as well and results of the financial items also.

The financial items, I think this is safe to say that this is a challenge when we Clavister has an insignificant level of debt. We had a EUR 20 million loan with EIB, which is in euros. So as interest rates are increasing, so is the impact on Clavister from that loan also. And of course, since the loan is in euros, we need to evaluate that to correspond to the FX effect, which also has an impact. Looking at what is the cash impact there, 3.2 million. So the majority here, 17 million has no cash impact. It is currency revaluations and long-term interest that will be paid when the entire loan is due, which will be in several years from now. But I think it's still important to see that financial impact and our financial net that has a cash flow impact has increased from SEK 1.1 million to SEK 3.2 million, and that is due to increased interest rates. So this is something that we're monitoring closely. Some other points, more on balance sheet and cash flow impact. So CapEx investments are -- have increased a bit, primarily driven not by increased costs in the tech organization, but rather that we have less maintenance in the period and more development work. So we capitalize more, but the cost base is quite comparable. So there is a high degree of development. Amortizations have increased. So -- and then why? Well, the primary explanation here is that if we go back -- so 3 years ago, Clavister switched from more to saying CapEx investments over 3 years, and we're doing that over 5 years. Meaning, we have a gradual buildup of amortizations who are now leveling out on a new somewhat higher level as a consequence. So this is accounting driven, if that's the absolutely primary explanation. Cash flow. As you know, we're looking at cash flow from operating activities before working capital changes and after. So before working capital changes, we see that the substantial improvement of EBITDA translates to a corresponding improvement of cash flow. So from minus 11 to plus 0.5. So the underlying cash flow trend in Clavister is positive are our increased profitability within the business translates to increased cash flow in the business, also important. But balance sheet changes was challenging for us in the quarter. The main explanation here is prepayments for inbound shipments of hardware. We are paying in advance, for having those hardwares being produced and then shipped to us, which means that we're buying more in inventory, but we secure a delivery capacity going forward, which is very important for us.

We don't expect the same level of negative impact on the balance sheet going forward, but it has been a challenge in Q2. We also have increased accounts receivables and the decrease of accounts payable in the period. So these are 3 negative effects from a cash flow perspective, which has a burden on the balance sheet cash flows in the period. But we expect that to ease as we go forward.

So the cash position, even though the operating cash flow has improved significantly, the change in cash position is minus SEK 20 million in the period. If we look at our number of FTEs, you see that we have reduced that with 20 FTEs, compared to the same period last year. It is due to the optimization program, where we try to do more with less people. That has had an impact on consultants, who are some more compared to before the cost optimization program, but that is also coming down a bit from 16 to 15. We're trying to and working to find an appropriate balance, and I think it's safe to expect that the number of external consultants will drop a bit, as we go forward, and the number of FTE might increase somewhat as we find appropriate mix between our own staff and consultants.

John, do you want to mention a couple of words on the outlook?

[John Vestberg, executive]

Yes, absolutely. Thank you, David. So I mean, essentially, we maintain the same outlook as we've been having for the past quarters. So what we're seeing is an increase in sales growth. We are on that track already. So it's our continuation expectation there. We see a lower OpEx expectation, of course, and those 2 factors together, of course, they will take together yield improvement in both EBITDA and as a consequence, full year positive EBITDA. We still maintain the ambition to reach positive operational cash flow in the second half of this year. And from the long-term perspective, being able to reach a 20% average growth is still our ambition. So with that said, we're leaving over for the Q&A session. So Kate will be happy to moderate your questions.

[Unknown Executive]

So yes, thank you very much, John and David, for your insights. And now it's time for the Q&A session. [Operator Instructions] We have already got a few questions. So let's dive into the first one. So cash flow and cash position, do you see that as a problem?

[David Nordstrom, executive]

I think there are several elements to that question. One is, we see an underlying improvement where we burn -- we continue to burn less and less cash in our operation, which is positive. So from that perspective, the trend is right and in line with our plan. But of course, we're buying cash in the period in the balance sheet, but we expect that to ease going forward. And as we say in the report as well, that we have an adequate cash position at the moment, but we're also investigating several good activities that will strengthen our cash position going forward. So I think that's what we can say at this stage. I hope that answered that question. John, do you want to?

[John Vestberg, executive]

That's on spot. Cash position, for now, is safe. Going forward, we're exploring different opportunities. But as the underlying business is growing and our cash burn is improving, we see a number of really positive tools at our hand, but we're happy to get back to that when it's due time.

[Unknown Executive]

Okay. So next question is, you report strong EBITDA improvements. What is the main driver?

[David Nordstrom, executive]

Should I answer that? I think we went through that in the presentation as well, but let's repeat it. It is really the product of our strategic work to improve Clavister. I mean we have better support from our margins, driven by growth, but also, our shift towards a subscription-based business model where we earn more of our contract base. I mean that's one important driver. It is a cost reductions that, as a consequence of our customization program.

So yes, 3 things. Growth, better margins and cost reductions. These are the 3 main drivers of our EBITDA improvement.

[Unknown Executive]

Okay. Then the next question is, can you elaborate on the major loan repayments renewals, especially to defer to tax payments? Any new since the last quarterly report on that?

[David Nordstrom, executive]

Well, we can say a couple of things. One is the tax debt is something that we are looking into, with 3-year repayment plans to land that debt on a good way. I think we have informed this community a couple of key reports back, that we applied for a 3-year repayment plan of one of the tax debt as a test balloon, and we got the 3-year repayment plan for that. And as we progress in time here, we will keep applying for these type of repayment plans. And we're quite confident at our ability to gain that, as we're already in that and repaying the debt that we have according to such repayment plan. So that's the aim there. And then we have a good dialogue with EIB, to find a mutual way forward how to repay the EIB loan on terms that are good for Clavister, and they are good for EIB. And that discussion is ongoing, and I think we can get back to the investor community when we have more news to share there. But it's a good dialogue.

[Unknown Executive]

Okay. Thank you for elaborating on that. Next question is moving into the 5G Security business. So is good comment. It's good to see growth in the 5G security business and a nice announcement about Three UK. You expressed ourself cautious about the 5G security business, though. So what is your view on the future in this area?

[John Vestberg, executive]

I think we can start with the Three UK. deal, which for us demonstrates that the technology is very viable. There is a demand for it. And this is one of the early 5G deployments in the world that has matured to the level where cybersecurity is a given in such a network. But again, I mean, the harsh financial markets and the sort of macro situation has really put a buffer live on the major investments from the operators.

So for us, we are confident that this is a timing matter. It's not a technology fit. It's not a matter of needs from the operators, it's basically an investment timing. I think it's important to mention that -- and I'm not sure if we've been clear on this fact before. The technology stack that Clavister has, is common across all our business areas, which means that our marginal cost to drive our 5G security business is more or less 0. We maintain the same development efforts. We maintain the same maintenance. We maintain the same support levels, as we do for all of our other business. So we are profitable in this business area, that's important to understand. And we maintained a positive outlook.

But we are absolutely aware of the lumpiness, and we see quarters without orders. We see quarters with big orders. And my personal view is that this will continue for foreseeable time, until we see different sentiments on the market in terms of investment capabilities.

[Unknown Executive]

Okay. So yes, with that, we don't have any other further questions, but then I would like to round off with asking you, John. So what are you most proud of from the last quarter?

[John Vestberg, executive]

Yes. I mean, obviously, that we've been able to move from a declining order intake position, to now a strong order intake growth. And that, that type of growth did not only come from a few selected orders, but that we saw growth across the entire board. That's really what I'm happy at.

[Unknown Executive]

Great. And David, for you, what are your highlights?

[David Nordstrom, executive]

I think a highlight for me is we set out some quite a long time ago, a plan to gradually, we're not making small adjustments, small improvements, but continues to do that, to drive a more profitable Clavister. And I think we're seeing evidence like strongly improved cash flow from the operations, improved EBITDA, that the cumulative effects of these strategic initiatives to land in a better, more profitable growing Clavister, they are yielding results. So I think we are progressing with the plan to improve the company. I'm glad to see that several metrics are continuing to point in the right direction, that we're taking steps, and then we improve when we take further steps. I think it's -- that's my highlight.

[Unknown Executive]

Perfect. So yes, with that, thank you very much for your insights and sharing that with us. Thank you to all attendees for being here with us today. And the recording of this webinar will shortly be available on our website. And with that, I say thank you, and have a great day.

Bye, everyone.