Clavister Holding AB

STO:CLAV

Earnings Call Transcript 2024-Q2

[Kate Linwood, executive]

Good morning, everyone, and welcome to our Clavister Q2 Interim Report presentation. My name is Kate Linwood, and I will be your host for today's session. And I would like to introduce you to our presenters today, which is John Vestberg, Clavister CEO; and David Nordstrom, Clavister's CFO.

So we will start today's presentation with the Q2 report by John and David. And after the presentation, we will have a Q&A session. [Operator Instructions]. So yes, with that, I would like to hand over to you, John.

[John Vestberg, executive]

Thank you very much, Kate. And again, welcome to Clavister's interim report presentation. So to start with, I'm really happy to see that the transformation journey we are on continues according to our strategy.

So this quarter, actually, the notes are 11 consecutive net sales growth quarter. So if everything goes according to plan, there is a good chance that we are to celebrate a 3-year growth quarter next quarter.

If we look at the sales for the quarter, it came in at around SEK 45 million, and that is around 17% growth. This is somewhat below our ambition. Keep in mind that we had set out an ambition of 20%. I still think it's important to look at a key -- a few key aspects from the quarter. We had expected a number of quite large deals to come in during the quarter. They did slip into the second half of the year.

And secondly, as you've seen in the report already, probably the currency headwind is quite impactful on Clavister given our sales in euros and SEK. As a matter of comparison, if we adjust for the currency effect, our net sales growth came in at 23%. So a full 6 percentage points of impact.

If we look at the underlying growth drivers. Given that, as I mentioned, a number of larger deals slipped over into the second half of the year, it's quite interesting to see that the growth is driven mainly by 2 factors. Of course, deliveries that continues from existing defense contracts. That's 1 part, but also from the underlying base business that continues to deliver stable growth.

If we look at the actual shipments in the quarter, there was, first of all, an increase in the volume of shipments, that's good. The quarter saw quite a large share of hardware components, the hardware that our customers use to run our software. This is momentarily impacting our gross margins, again, because we're selling our hardware components to a quite nominal margin in order to onboard customers as soon as possible on our software.

As you might recall, our gross margin target is 80%. We came in slightly below at 79%. So it's still okay, but somewhat below, entirely affected by the volume of hardware. Still important to keep in mind when we ship a hardware, a customer would never buy a hardware from Clavister without signing up for a software contract. So these shipments that we made in the quarter that they would basically mark the start of a number of software contracts where revenue recognition will happen over time going forward.

With the underlying growth, the business flow we see, we essentially copy paste from our Q1 standpoint where the full year, we continue to see a positive view on that. We believe our net sales growth has a good chance to stay above our expected 20% for the full year. We see absolutely the trend going in that direction.

If we look at the cost levels, our operating expenses, they are more or less on par with the previous year's cost and as you recall, the ones who have been following Clavister for a while, you've seen that we've placed a lot of effort on our cost level. And we plan to maintain the cost level we have for the full year. So we don't expect any surges in OpEx.

A positive indicator from the quarter, looking at our operational cash flow that turned from minus SEK 8.4 million last year to SEK 4.3 million positive this quarter. And with the total cash burn, including the repayments we're making has improved significantly in the quarter. Also from the cash injection we had since Q1, we maintained a strong cash position. So that's all good news. That gives us a good position for driving this journey going forward. With that, I'd like to move over to David.

[David Nordstrom, executive]

Thanks, John. So we will look at something more -- a bit more on our performance in certain areas. We start with order intake. So looking at the order intake for Q2, we see a 13% growth. Looking at all quarters here since 2022, we see that this is the first quarter where we go above SEK 50 million in order intake without support of large defense contracts.

I think -- and that is interesting, and I'm going to elaborate a little bit on this since an ambition for us for a long time has been to reduce the volatility in our growth, order intake, of course, will always be quite lumpy due to the inflow of large contracts that happens in certain quarters, but not in others.

But to reduce the lumpiness and ambition for us is to grow the base with -- and base is next generation firewall and IAM because that is built up of much, much more contracts, but they are typically small to midsized, not so often very large as to opposite of defense and telecom who more often have large, but few contracts.

So to see the growth coming on these levels driven by the base, I think that's quite strong. So glad to see that we go above the SEK 50 million mark without support of large defense and telecom contracts. So we're pleased with that. .

That then fuels net sales of 17% in this quarter. Looking at the long-term trend, we see that the trend line of growth is clearly there. But as John alluded to, 17% is a bit below our ambition of delivering 20% plus growth. And of course, we were aiming for a third consecutive quarter with about 20%, didn't fully get there. We landed at 17%, if we would be counting the FX effects, we would be above 20%. But when we set the target to drive 20% or above growth for this year, that means in reported numbers. So didn't meet the target for this quarter. So the ambition to drive more growth is clearly there.

Looking at ARR, continue with 2-digit growth, 11% in this quarter. Net sales in this quarter was very much fueled by hardware in both defense and civilian hardware. So that, of course, doesn't give the full support in growing ARR with the same number. And so the 17% doesn't fully translate into our ARR growth.

But I would say that, that's a quite good number. It's a stability here. We have -- since we started reporting in ARR for 2022, we have seen no individual quarter with any decrease in ARR, but rather stability and growth.

If we move over, talk about gross profit. Well, gross margin-wise, John mentioned that in his presentation, it came in at 79%, a little bit under our ambition of 80%. Of course, compared to the comparison quarter, it was almost 84%. And explanation here is, of course, we have much more defense deliveries in this quarter. They are hardware-centric, the majority of delivery is made to BAE, but we also have a strong growth of civilians firewall hardware. So hardware is a growth driver in this quarter.

And that means, of course, that is good for net sales. But the gross margin in hardware is not as strong as for software. So of course, with more hardware and sales mix, that has an impact on the gross profit. So we don't carry the full 17% here, we carry with us 10% growth.

The trend line is there. We come in with, I would say, the second strongest gross profit quarter of Clavister so far. So I would say that's good, especially with so much hardware in the mix.

Then OpEx. Of course, for us, we set out an ambition back in 2022, well actually late '21 to bring our costs downwards that we did. That has now evened out for some time. As you know, we have been communicating also that our ambition is to maintain costs at roughly the same levels at 2023.

We're succeeding with that. We have a 3% increase of cash OpEx in the quarter, given the fact that we have a much stronger growth trend line for some time out. Now this quarter, growing with 17% of net sales. We have had strong inflation push for pushing costs upwards for quite some time even though the inflation rates now are coming down, there has been a -- we are in an environment where it's -- it is a challenge to keep costs down.

So I think us being able to keep costs down on these levels despite the fact that we're growing, despite the fact that we have quite a lot of inflation-driven cost pushes around us, I think this is also something that we're proud of, on this achievement.

And that, of course, then moving over to EBITDA. It grows in reported numbers with -- or adjusted numbers from -- with 30%. So there is a continued EBITDA growth. But we have to say that we feel that a 12% adjusted EBITDA margin is a bit slower, a little bit less than we were aiming for in this quarter.

Of course, reason for that is our sales ambition, not -- sales not fully meeting the ambition, a little bit of a weaker gross margin due to more hardware in the sales mix, and that's the root cause of the EBITDA, and that's fully being where we want it to be. I don't think cost is the problem here because we're maintaining cost on the level that we set out to do.

So focus here going forward is absolutely a growth focus to drive more sales. So -- and that will in turn drive EBITDA growth going forward. So I stop there, for the main comments move over to you John to do more updates in the business.

[John Vestberg, executive]

Thank you, David. So a bit of a dive into the actual business then, starting with the base business. And as David explained and also written in the report, we count our civilian firewall or Next-Gen Firewall sales and our Identity and Access Management sales to our base business. And reason again, being that this is a business that is spread over very many partners and system integrators and end customers and many, many contracts, with each contract being fairly small to medium sized. So it serves as a good blend and a good base platform for our business. What we saw in the quarter was that both our Next-Gen Firewall and Identity and Access Management business continued on the momentum and the growth they've set out and more or less replicating growth and business from previous quarters. As this business is predominantly or almost exclusively recurring, it's the business that clearly impacts ARR and of course, as a result as well, sales growth.

One important, I would say, change in narrative or change in behavior, if you like, is that we start seeing an inflow of larger opportunities that we haven't been really used to see before in this area. As you might know, we have been, for some time, focusing on customers with mission-critical applications in Europe. Among those, we find public sector, we find energy and utility companies, of course, telecom and defence as well, all of them mission-critical.

Within the firewall area and IAM area, we see an inflow now of requests and opportunities and concrete tenders coming from larger public administrations in Europe as well as private -- large private companies as well.

Worth to mention, of course, is that lead time from opportunity to hopefully of 1 deal could be many years in some cases. But starting with opportunity inflow is, of course, the base for any future business coming from there.

One good example coming in this area during the quarter was a European authority. We're obviously not allowed to disclose the name or the country, but a customer with whom we're expanding our collaboration, they are both renewing and expanding with Clavister. They came in with an order worth SEK 7 million over 24 months. That's good on its own, even more intriguing might be the fact that there is a number of options to this customer, including expansion of time, but even more important expansion of the scope of the contract. So we're looking at a possible total contract value of up to SEK 22 million. So that easily turns that type of customer into one of our largest customers. And hopefully, not a one-off given the inflow.

Another key aspect, and this deserves some comment. When we transformed the business from perpetual -- mainly perpetual sales back in the days to a recurring revenue model based on subscription-based licenses, one of the goals we set out was to reduce the contract rates. And this might perhaps sound counter intuitive, why wouldn't you want to commit your customers to long contracts.

The reason is quite simple. What we experienced in the past was long contracts. That's good. I mean we have a lock in on the customer. You can debate whether that's good or bad. But that was a fact for quite many years of average contract lengths, 3 years, 5 years, even longer in some cases.

The challenge with long contracts or basically 2. One in order to win that type of contract, you typically as a salesperson or as a system integrator reseller have to provide quite significant cash discounts. That's the typical negotiation situation you find yourself in. And secondly, when you have that type of long contract, you are essentially bound to a price for a long period of time.

Given that the majority of our business includes equipping our customers with either boxes or on-prem software, our customers are still quite tied to Clavister, if you like, the alternative cost of replacing Clavister with a competitor is significant. It includes on-site visits, on-site consultancies and so forth. So we did not really see a big risk of moving to shorter contracts.

Rather, we saw the benefits coming from, first of all, not having to give out large discounts and secondly, being able to execute price changes on a more recurring level annually for a start. And we've seen the effect already in a revenue stream, but also from an average contract length, we see that the trend is going from longer contracts to shorter contracts, even down to single month contracts that are continuously then being renewed.

I would say the exception still might be in the very large public sector tenders and public sector opportunities where you typically are accustomed to longer contracts and that might be a firm requirement. But apart from that, a trend towards shorter contracts, and that's good.

We also announced in our previous report that we're working on strengthening our offering. Specifically, that means that we're working with both our market communication, specifically product marketing, product packaging, knowing that our products, our technology is more or less very, very competent, Swiss Army Knife of many, many, many capabilities. The challenge has been, as always, when you have a very strong technology, how can you package that in a way that is really appealing to the key customers we would like to address.

So instead of providing a Swiss Army Knife where it might be a bit hard for resellers or customers to really appreciate the value or the customer proposal, we are moving towards a situation where we have clearer packaging, more solutions tailored towards the individual customer groups, still benefiting from the same technology base. So we're not doing any bespoke development that's important. So we're not looking at massive R&D efforts. We're looking at how we deal with market communication.

I think going forward or I know going forward, you will see effects of that examples being updated, websites updating, product, marketing, collateral and so forth. So clearly, that will help our customers to understand our products better.

Moving over to Defence. One of the important marketing activities we're doing at Clavister includes industry events and defence is no exception to that rule. The biggest industry event we have in defence is the Eurosatory trade show. It's an exhibition held every second year in Paris and a counterpart in London every other year. So this is the world's largest defence exhibition and we're looking at some 60,000 visitors every year. Clavister had its own booth at the trade show. And we had a quite sizable crew down there, demonstrating our Cyber Armour offering and our products in general.

Interestingly enough, at a trade show like this, obviously, the key ingredient in such a trade show would include the latest battle tanks, the latest armor, the latest ammunition and so forth, there was quite limited amount of IT and Clavister stood out as 1 of the very, very few vendors that combined the cyber capabilities with the defence capabilities and with the AI capabilities. So it really attracted a lot of interest from visitors, some predefined or prebooked meetings, but a lot of just wondering about people that visited our booth.

Within the scope of the trade show, we had the opportunity to sign a memorandum of understanding with Thales Group, and for those of you who don't know Thales, it's a French defence technology supplier, 1 of the largest in the world. We've been working with Thales for quite some time. They've been evaluating our technology for a few years. And this year coming to the conclusion that our technology fits very well into some of the product offerings that Thales have towards the defence sector.

So the goal with this cooperation is essentially to utilize the strengths of both companies, our technology strengths and obviously, Thales wide reach into defence and use that as a tool to leverage sales basically to Defence segment. We'll start in Sweden. With Thales customer base in Sweden, but gradually expand over to other countries, other customers within the Thales Group.

If we look at previously on defence contracts, nothing new to report, really. We continue the serial deliveries. Important, of course, to understand that the quite good order book we've built from those contracts, that will continue to serve growth and revenue support for many years ahead. We're looking at deliveries right now according to plan, up and through 2029. So quite a massive time ahead with the revenue support.

Also worth mentioning that the large defence contracts that we announced in Q4 has still not been showing effect in our revenue. That's important -- that's still ahead of us. So we're in the final rounds of product development and providing prototypes to the customer. That serial delivery will start soon. So we will soon be able to recognize benefit from that in our revenues as well.

Moving over to Telecom. Telecom market in general, still quite gray, I would say. There is continued uncertainty from a macro level. We all know that. We are seeing some signs of recovery? And what do we mean with that? Well, specifically, the only measure we can have is the inflow of opportunities. And our expectation to be able to convert some of those opportunities or hopefully many of those opportunities into concrete deals.

In June, we were already announcing 1 of such contracts, sizable one, a very sizable one, worth SEK 20 million to SEK 40 million for Clavister. We had to announce that even though the contract is not won or signed, we had to announce it due to regulatory reasons. Still important to understand that this is an active ongoing business opportunity. But as a disclaimer, there is no certainty or no guarantee that Clavister will win it, although we have great hopes. I think the key point here is to just identify that it's an indicator of the type of deals that we are working on currently within in the Telecom context.

There are a number of smaller agreements as well we're working with, and we hope to be able to bring them close to closing or even through closing in the next quarters. So with that, if we then David move back to the financial ambitions and just look at our current performance.

[David Nordstrom, executive]

Yes, we have an ambition to grow net sales with 20% or above 20% on average for the year 2023 to 2025. In this quarter, we achieved 17%, meaning to reach the target, we need to accelerate growth in the quarters coming in this year and during 2025, and that's clearly also the ambition.

Gross margin at 80% or above 80%, we were at 79%, so we were near the target, and those of you have been following us for some time know that we have a high ability historically to be at 80% or above 80% or when going below, we have been very near 80%. So I think that target remains, and we are determined to keep that. And of course, there will be some fluctuations depending on the amount of hardware in the sales mix in relation to software and consultancy services. So that's where the volatility comes from.

EBITDA at 20% or above 20% and when we say EBITDA, it's adjusted EBITDA. Typically not very big variations between adjusted EBITDA and reported EBITDA, might be some. We came in at 12%. And as we said in the presentation before, this is a little bit below what the ambition was for the quarter. And but it doesn't come -- the impact doesn't come from the OpEx. It comes from net sales.

So of course, to drive that, it is a clear growth ambition going forward. And then operational cash flow, meaning cash flow from our operations when we take the balance sheet effects into account, ambition is to go positive, and we delivered -- we delivered positive numbers in this quarter. So that summarizes these targets. So back to you, John, for final remarks.

[John Vestberg, executive]

Thank you. And as a round up then, if we, from an investor point of view, especially if you're new to Clavister, just as a summary, what we'd like to convey as some key reasons why Clavister would be a good investment case. We're operating on a market -- the cybersecurity market, which is obviously not only a large market, but it's a fast-growing market, and it's noncyclical. I mean, the cyber threat is constantly there. It's there all the time.

We have in our platform, in our portfolio, software, which is proprietary. We own the IPR, any company with self esteem has to have AI these days. We do as well, and it's not a made-up marketing-wise AI. It's a really competent AI component, the result of many, many years of academic research. Combined with the rest of our portfolio, this provides a very, very strong software offering, that combined with our tailored hardware gives good turnkey solutions to our customers.

We have over the many years we've been operating been able to build international, even though our geographical focus nowadays are very much in the Western and Northern Europe part of the world, we still have a broad international customer base that provides us with recurring revenue. and we have a number of blue chip customers as well, including customers like Nokia, BAE Systems and so forth.

With the business model, especially the latest years when we've changed into recurring revenue model with the gross margins we have, it is an attractive business model. It's highly scalable. And as you've been seeing for the past number of quarters, we've been able to maintain a fixed OpEx and still scale our top line, and I think that's a testament to the business model itself.

The platform is in place in terms of strategy, that supports our future growth. We don't plan to do massive strategy changes. We don't see any need for that. We will continue to execute on the plan we have. And the team is highly motivated and we look at a strong competent team, not only covering cyber, but also business and technology in general. So all in all, a good investment case, of course, being a bit biased.

With that, moving back to you Kate, and room for questions and answers.

[Kate Linwood, executive]

Yes. Thank you very much, John and David for sharing your insights with us. Let's dive into the questions. We have already received quite a few of them, but please keep them coming and submit them. We're happy to pick up and answer anything. Yes, you want -- you're interested in knowing more about. So I would say, let's start with the base business.

We've got the question saying you're talking about acceleration in your Next-Generation Firewall business, but why aren't we seeing this in the numbers?

[John Vestberg, executive]

Well, on the contrary, I believe we see that in the numbers. Again, if we look at previous quarters with even higher growth than we had -- also in those quarters, good support from some large contracts and larger deals. The growth we're seeing now comes from our base business. So that's -- I think that's a testament to that growth can be more, yes, it absolutely can. So I mean that's part of our daily operation to continue to optimize our go-to-market and optimize our sales efforts. So I think we can still distill even more growth from the base business, but it's there as a foundation.

[Kate Linwood, executive]

Okay. Staying with -- in the area of Next-Generation Firewall and hardware shipments, got a the question, saying you ship a lot of hardware during the quarter. But at the same time, your ARR only increased by SEK 1.4 million sequentially. Could you explain the dynamics there?

[David Nordstrom, executive]

Yes. I mean, first of all, so when we ship something, we ship -- typically, we ship a hardware box. Well, that's an engineered computer really to drive the firewall software. The hardware itself doesn't count as ARR. It's only hardware. So ARR is the value of -- the annualized -- ideally value of the software components sitting on that hardware.

Then the question comes if we ship a hardware to a customer, that customer typically don't start that hardware instantaneously because it's a lead time. So when does the ARR component kick in? Well, it kicks in when customer, the end customer has activated the firewall license. So it is a lead time. We sell a hardware to a distributor. The distributor ships it to a partner. The partner ships to an end customer that then activates it. So it's a lead time also from growing hardware until that impacts a software growth. So I think 1 needs to also be aware of that. Maybe a little bit of a long answer, but to explain that.

[Kate Linwood, executive]

That's good. We've got a follow-up question as well now. What kind of mix between hardware and software do you expect for second half should gross margins be above 80% again in H2?

[David Nordstrom, executive]

We don't guide, so it's hard to give a very clear answer to that question. I think what we've said historically, and I think that's the answer we can maintain is, if we maintain growth -- and of course, our ambition is to grow. We need to also lead that growth to a certain degree with shipping more hardware. So if growth accelerates, the volume of hardware sales will also accelerate to enable us to sell more software.

And when we grow, that has an impact on gross margin because -- if we had no growth and if we were looking historically at quarters that has been weak growth-wise, our gross margins will then near 90% because it's too little hardware in the sales mix. Then you only have the -- say you overproduce this -- the margin strong software. That's not desirable because that doesn't scale long term.

So growing means more hardware with an impact on gross profit day 1 because then you have the hardware component. Day 2, you sit with a software component, and that will drive margins going forward. So -- but again, we don't guide. So we don't say that, okay, this will be the numbers we will reach in Q3. We don't do that. So if you believe in growth, you should factor in that, that comes with certain challenges for gross margins.

[Kate Linwood, executive]

Another question around this topic is what's the lead time of hardware shipments to software contract roughly. Can you elaborate on that?

[David Nordstrom, executive]

Yes. It's very big variations in that. But if you could say it's typically, if we look at the blended mix of shipped-not-started software contracts, on average, it's around a month.

[Kate Linwood, executive]

Okay. So thanks for the questions regarding the base business. I can't at the moment, see any more in that area. So I'd say let's dive into -- defence is always a popular and we've got a few questions here. So one is about the recent defence order we got the SEK 5 million defence order, which I understand was only software. Could you expand a bit on this? I believe the defence offering always contains hardware as a base?

[John Vestberg, executive]

Very good question. And that's a good point. It's correct that the recent order announced was software-only. That's an important topic. So the defence offering is not always based on hardware. Hardware might be an important component, especially if we look at, for instance, the BAE Systems CV90 projects where the customer takes a lot of effort into securing the robustness, the environmental specifications, the certifications of the product and so on and where we are able to come in with a turnkey solution, turnkey product that sort of answers to all of those requirements, plus all the capabilities of our software, which is, in essence, the key IPR we have.

In the recent order that we announced. In that case, the customer is already on top of their own hardware components. They have selected hardware since before, and they are perfectly happy taking on the integration work on their own. So for us, it's a software deal. It's the key capabilities of the software that provides the defence features, if you like. And of course, from a margin point of view, selling software is good from a total top line perspective, it's a bit less, but that's fine. It's still a good blend.

Looking ahead, if we look at the offering we have in defence, in general, we see a good mix of both hardware-based offerings, hardware-based deals and pure software-based deals. So it's not a one-off going forward.

[Kate Linwood, executive]

Okay. General defence question. Could you talk about the competition within the defence contract ?

[John Vestberg, executive]

Absolutely. I mean, the obvious and a bit boring answer is, of course, it depends. If we look at the established partnerships, for instance, with the systems where we're part of a design win, it's really not accurate to talk about competition because to a great extent, we secured our position already, then there is always, of course, a slim, but still a risk that the end customer would like to have something else.

We haven't seen that yet, but just to be clear that it might be a risk. But otherwise, we are highly designed in. And I think the testament to that is that in all of the recent CV90 wins by BAE systems, Clavister is included.

If we move outside of those deals and look at completely new defence tenders, of course, there is competition. In some cases, if the -- if a tender is more a, let's say, a routing related or a communication-related tender, we see competition from some of the usual suspects, and that would include, for instance, Cisco and others.

If we move the needle to a tender where the customer appreciates strong cybersecurity, AI and so forth, the competition playfield or the available competitors are much less, to be honest. And that comes back to my comment from Eurosatory that the interesting combination of AI, defence and cyber. That's an interesting cocktail that we have where most of the standard traditional, I would say, competitors in the civilian side, they don't have that focus.

[Kate Linwood, executive]

Okay. We have some questions around BAE orders. Can you please give an update on the CV90 pipeline? BAE has won some orders, which should meet additional orders for Clavister. Yes, perhaps can you share some light on that?

[John Vestberg, executive]

Yes. I think it's analogies to what I just mentioned that so far, the 1 BAE orders have resulted in orders to Clavister. The lead time between BAE winning an order, and that translates to Clavister order could, of course, vary if we look at the previously one -- the largest one, that was close to 1 year of lead time between those 2 events.

I'm not saying that, that has to be the case always, but just to get some magnitude of the delay. So keep in mind, as soon as BAE Systems announced CV90 win, it does not translate to an order to Clavister the day after. That's not the sanction. It will take it's due time.

But the pipeline, it's obviously interesting and sad enough the state in the world is fueling more pipeline for BAE. Good for the business, but a bit sad for the world, you might say.

[Kate Linwood, executive]

Yes. So if we look at the broader scope, there's a question about the market potential within the whole CV90 deals with BAE, the question is can you give some color on the addressable market potential. Yes, we indicate that we have shipped to 2 clients. But if we would have the software on all CV90s produced, what is the potential in that area?

[John Vestberg, executive]

Yes. Well, if we start looking at sort of the addressable market in general or rather starting with the BAE market, the CV90 market. So I believe CV90 from BAE has moved from being 1 of quite many inventory fighting vehicles on the market to becoming, I would say, number 1 ahead of [indiscernible] and General Dynamics equipment. There are roughly 1,500 to 1,600 CV90s being produced so far, if I recall it correctly. We are part of 4 nations CV90s already. So it's Norway, it's Holland, it's Slovakia and Czech Republic. And if we look at the other markets where CV90 is operating, then we're talking about fairly nondigital, less digital equipment, operating, for instance, in Sweden and in Finland. But if we look at the new markets, it's obviously all digital.

And again, just to repeat, then it's highly likely that Clavister is involved. Then, of course, I mean the defence market or the integrated vehicle market is much bigger than inventory fighting vehicles. We look at the main battle tanks. We can look at the armored carrier vehicles and so forth. So the CV90 in the very big perspective is still a small market, so there is much, much more market for a company like Clavister to grab when we continue to explore that.

Just within the BAE group, they produce, I don't know, 20, 30, 40 different kinds of vehicles where the CV90 is only 1 and the demands and the requirements start to be the same. I mean, cybersecurity is coming into all aspects of all type of vehicles over time.

So I mean, it doesn't give you a [indiscernible] answer in terms of market size, but I think we can just conclude that it's a very sizable within the BAE group, within the CV90 and outside the BAE Group, but very sizable market.

[Kate Linwood, executive]

Okay. So I think that's all the questions so far for the defence industry. Let's quickly dip into the telco industry. So you mentioned in your presentation that we have ongoing negotiations with a significant contract, and that is still outstanding to this still work in progress. But -- if we look at the, say, the general outlook in that sector, can you elaborate on that?

[John Vestberg, executive]

Yes. I mean we've all seen what has happened on the telecom market over the past quarters with quite some dramatic layoffs in -- with the big players, but that doesn't change the narrative. There is still an underinvestment in 5G. There is absolutely an underinvestment in cybersecurity and -- as you know, 5G and cybersecurity are highly coupled because of the softer nature of 5G and the associated threats and risks.

So I think the comment we made on that we see signs of recovery on the horizon, I think that sums it up quite good. So we see inflow of concrete deals. We see still some hesitation on the market whether or not to engage in new projects, new big 5G investments. But on the other hand, time -- time is your enemy here, the more you wait, the more underinvested you get. So it's clearly coming, and we have great hope for it.

[Kate Linwood, executive]

Good. Thanks for your insight on that. Then we've got some financial-related questions for you, David. How is the personnel cost effective in Q3 in 2023 that were 20% to 30% less than the other quarters?

[David Nordstrom, executive]

Yes. I mean it has 1 simple explanation, and that's vacation. So during Q3, I mean, you have, of course, months July and August where the absolute majority of our staff will be off on holidays. There might be 1 or 2 moves out hunters off in October, but that's quite a few, at least in Clavister. But -- so I think that's the explanation.

So trend-wise, we expect that to be in Q3 this year as well that, okay, we will have lower staff costs as people will be on vacation. The negative side of that typically also is since people are on vacation, both at Clavister and at our customers activity levels also tend to be a bit slower in Q3. So that kind of a seasonality that we typically have.

[Kate Linwood, executive]

Another finance related question. Could you elaborate on how the currency affects your revenue growth negatively. Shouldn't a stronger euro benefit your revenues?

[David Nordstrom, executive]

That's absolutely true, and it's also a good question. So to elaborate a little bit on that, if we say, okay, so for -- if this Swedish SEK weakens, what happens? Well, we sell quite a lot in euro. So typically, that is good for us. Our debt is in euros. So for the financial net, it's bad. And if we weaken versus the dollar where we source, we typically source hardware components in dollars, that's also then more negative than positive. So that's, in general, the financial -- the currency effects, how they impact us. So then what we see now is we had the route for the FX effects that we see in Q2, it mainly comes from very large FX -- positive FX effects in Q2 last year. So it's with the comparison of Q2 last year, we had -- where FX effect inflated net sales Q2 2023. So it's -- with comparison period, that's why you get a very big impact.

In this quarter, the FX -- isolated FX impact on net sales is smaller. So it's what you take Q2 '23 into account, you get this very big difference. I hope that answered your question. Otherwise, please write off a follow-up question [indiscernible].

[Kate Linwood, executive]

Okay. We have a general question regarding deals. The deals that slipped into Q3 instead of Q2 that you mentioned in the presentation, what size of these deals and in what business areas?

[John Vestberg, executive]

I would say, mainly, we're looking at larger deals that come from defence and telecom. That's typically where we -- again, as David mentioned earlier, where we see this lumpiness with large deals and where Clavister is not always or rarely, I would say, being able to impact the time plan. So the risk of things slipping it's a bit larger in those areas. So we're looking at larger deals. That's as much as I can say, and telecom and defence mainly.

There are a few examples in the base business as well. And hopefully, they will turn into deals for the coming periods.

[Kate Linwood, executive]

Okay. I do have another question for defence. And actually, it's 1 about like the general outlook 3 years ahead. Do you see any larger business opportunities for Clavister with BAE or Thales, but I would actually also say regarding the new software license deal with the European -- the European defence contractor. So what outcomes do you anticipate there?

[John Vestberg, executive]

Yes. I'm not sure if I should interpret the question whether or not BAE or Thales would post greater opportunity, but let me answer it this way. So obviously, we have come much further on the journey together with a customer like BAE Systems, it's a customer we've been working with for very many years, that has established us as a vendor and as a sort of a recurring contract them or to them.

With Thales, it's a younger relationship. Obviously, Thales as well as BAE, it's a very massive defence contractor. So there is a lot of business potential within the Thales relationship. It's a younger relationship. So we still have some groundwork to do and some ground to cover before we reach the same maturity level business-wise as we see with BAE right now.

So that being said, I would say, if you disregard the actual timing and just look at the business potential per se, both of those companies are similar in size with regards to opportunities and potential for us. If we look outside of those companies, I mean, we've announced some time ago, we announced our design win General Dynamics. We have -- the deal that we announced just recently, where we're not able to disclose the name. That's another factor that provides quite a good business or very good business potential.

So essentially, the strategy within defence is to engage and to acquire as many BAE likes as possible. Of course, then appreciating and acknowledging the fact that there is long lead times to get to the same level of maturity, but we need to start with adding a lot of them into the pipeline. And we did so for some years now, and it starts getting results from that pipeline with deals and contracts coming out and memorandums and so forth.

[David Nordstrom, executive]

Yes. And just adding 1 thing to that, which I think is relevant to bear in mind is that BAE is more or less a pure -- purely within the defence domain, whereas Thales is also largely on the civilian side. So it's quite interesting to see that you also build a relationship with companies that can benefit Clavister [indiscernible] of course, to military end customers.

I know we say Thales potentially also to the civilian side as they are supplying a lot of technology and security technology to users in a civilian domain for example, authorities and similar. So that might also have a potential impact going forward for us. And that needs to be seen further down the road.

[Kate Linwood, executive]

Yes. So we've had many questions from the audience. Thanks very much for that. I would like to -- before we close, I ask 2 questions to you, 1 to you, John, what are you most proud of from this quarter?

[John Vestberg, executive]

Yes. I think what I'm most proud of is the fact that our base business provides such a strong fundamental for the business and such stability, which means that even though we had headwind in currency, we had deals slipping and so forth, we're still seeing a base that continues to grow, continues to drive business and with the cost control on top of that, of course. So I think, in essence, that's what I'm most proud of.

[Kate Linwood, executive]

And David, for you, what are your highlights?

[David Nordstrom, executive]

Yes. It's on the same lines. I think we said quite far back that we feel that we can extract more efficiencies from the organization, from the people we have from the cost as we have. And I think that's the highlight that we continue to grow more sales. We continue to grow more profitability from the cost base that we have. So I think that's absolutely a highlight that proves the point that there is a good scalability in Clavister. And I think that's a highlight for me.

[Kate Linwood, executive]

Great. So with that, I would say thank you to you, John and David for the presentation and answering all the questions. Thank you very much to the audience for attending today and asking all your questions, that's really valuable for us to have that interaction. And yes, a recording of this session will be available shortly on our website. And with that, I wish you all a great day. Thanks for joining.

[John Vestberg, executive]

Thank you very much.

[David Nordstrom, executive]

Thank you.