Clavister Holding AB

STO:CLAV

Earnings Call Analysis

Clavister Achieves Positive EBIT with Strong Sales Growth and Strategic Advances

In a positive quarter, Clavister reached its first positive EBIT, marking a significant milestone. Sales continued to grow steadily, reporting a 16% rise in net sales and 21% adjusted for currency effects. Annual recurring revenue increased by 10%. The order intake surged by 31%, leading to a backlog of SEK 234 million. With an EBITDA margin of 25%, and operational costs controlled below 80% of sales, Clavister aims to exceed 20% sales growth in the forthcoming periods. The recent focus on cybersecurity, especially in critical sectors like energy and defense, aligns with ongoing market demands and strategic initiatives.

A Strong Quarter: Clavister's Growth Trajectory

Clavister has reported a stellar quarter, showcasing a healthy order intake growth of 31% compared to the same quarter last year. This translates to a strong foundation as the company continues to solidify its growth trajectory with 12 consecutive quarters of year-over-year sales growth. Overall, the company reported a sales growth of 16%, escalating to 21% when adjusted for currency fluctuations. Clavister aims to exceed a 20% growth in net sales in the near term, emphasizing its resilience even amidst seasonal variations and external challenges.

Profitability Gains: A Major Milestone

A significant point in this quarter was Clavister finally achieving a positive operating profit (EBIT), a target they have strived for over the years. The adjusted EBITDA margin rose to 25%, which is the highest reported margin to date, marking a 47% increase compared to the previous year. The company successfully managed to decrease its operating expenses to 77% of sales, highlighting a solid operational leverage as they drive for profitability while maintaining robust growth.

Annual Recurring Revenue (ARR) Evolves

Clavister's ARR grew by 10%, which is slightly trailing behind net sales due to the lag between contract signing and revenue recognition. The company is optimistic for Q4, anticipating an uptick in ARR as it continues to draw in new business. The current ARR figures account for approximately 70% of total business, driven by a transition to a recurring revenue model since 2021, which brings more predictability and scalability.

Market Expansion and New Opportunities

The cooperation with defense sectors, especially in light of the ongoing geopolitical tensions, is a focal point for Clavister. The company has seen heightened interest due to initiatives like the NIS2 Directive, aimed at enhancing cybersecurity across Europe, particularly in public and energy sectors. Clavister has launched new solutions targeting Operational Technology (OT) security and has initially secured contracts amounting to around SEK 2 million, projecting further growth opportunities as they scale.

Strategic Moves in the Defense Sector

The inclusion of Clavister products in NATO's catalog will serve as a significant growth catalyst, making them eligible for various defense projects. Recently, they secured a contract with a NATO country’s defense ministry for identity and access management, expected to cover several thousand users and potentially scaling to over 100,000 over 36 months. Such contracts enhance Clavister's credibility and visibility within the defense sector.

A Look Forward: Guidance and Expectations

Clavister aims to reach an average 20% sales increase from 2023 to 2025, despite currently being at 16%. Achieving this target will require heightened growth, possibly around 30% in 2025. The management believes that strong demand driven by external market conditions and strategic customer engagement is key to facilitate this growth trajectory. The expectation around operational cash flow remains positive, especially following successful capital raises, which should bolster their position for future expansion.

Earnings Call Transcript 2024-Q3

[Jenny Ramkrans, executive]

Hi, and welcome to our Q3 interim report presentation. My name is Jenny Ramkrans, and I will host this session. With me, we have our CEO, John Vestberg; and our CFO, David Nordstrom. We will start the session with John and David giving the presentation and then end the session with a question-and-answer session. [Operator Instructions]. But now let's start and over to you, John.

[John Vestberg, executive]

Thank you, Jenny. And again, a warm welcome to our interim report. Starting as usual with a summary of the quarter. After, I will leave it to David to walk you through some of the key metrics, and then we will look at some specifics in our individual business areas.

As an overall summary of the quarter, I think we can conclude that Clavister has had a very eventful and a very positive quarter, actually in all aspects from all metrics point of view.

One important milestone, of course, is reaching positive operating profit or EBIT. That's a milestone that we have been working hard to reach for a time and finally, this quarter, we came to that point.

If we look at our sales, the sales growth continues, and I think continues steadily, is the keyword here. We have now 12 consecutive quarters of year-over-year growth. So, I think that's something to be quite proud of to be honest.

If we look at the metrics, in terms of non-FX adjusted net sales growth, we reached 16%. Adjusting for FX, we're looking at 21% so we're hovering around the 20% growth numbers that we're targeting.

We would like to increase that somewhat more, we see that the trend is pointing upwards. Looking at annual recurring revenues, or ARR, a growth of 10%.

As usual, our ARR growth is trailing somewhat from net sales growth given the time lag from shipments of solutions or products to the actual contracts are starting.

Looking at our consequential, then our EBITDA margin raised even further to 25% adjusted. If we look at the growth drivers, I think one key takeaway from this quarter is that there are no major significant individual deals that is the pure explanation for the growth.

It's on the contrary, an overall improvement of our base business topped with deliveries from our existing defense contracts. So, the key base business in the company is overall improving in a very steady fashion.

Looking at [indiscernible] and order intake, you might have seen a strong flow of press releases during the quarter. And it is actually new business contracts flowing in over all our business areas.

And that's especially nice to see that we're gaining traction also in business areas that have been a bit flattish before, and we'll come back to that. So, all in all, the order intake for the quarter grew by 31%, which means that we now have an accumulated order backlog for the end of quarter at SEK 234 million.

Obviously, that serves as a very good base for further net sales development over the coming periods. You have probably also noticed that by the end of the quarter, we concluded the TO8 warrant package.

And we had a very nice pickup rate on that one, 98% participation. And as a consequence of that, it meant that Clavister was brought SEK 50 million approximately before transaction costs and as we previously communicated, the entire proceed is used to pay down our EIB debt.

With that, leaving to you, David, to talk us through the metrics.

[David Nordstrom, executive]

Thank you, John. So, looking at and starting with as usual, our stability in the trend. If we look at the trend line in the upper part of the graph, you see that we continue to be on a good order growth trend.

Also comparing Q3 last year to this Q3, we see a healthy 31% growth. Been following Clavister during the quarter, you see that there has been quite many orders press release, a good inflow of, I would say, midsized orders in this quarter, helping us growing.

In the same time, we've seen stability and good growth of the many smaller orders especially in the civilian firewall business. So, all in all, that leads to a good order intake growth in this period.

And if we move over then to net sales, I would say same thing there. We see that the trend line of growth, it is there, growing with 16% in reported numbers and 21% in FX-adjusted growth.

We can also see that we have an ambition to be above 20% growth on net sales numbers in reported net sales. We were [indiscernible] in Q1, Q4 last year as well, they didn't fully reach that in Q2 not in Q3 either.

But I think then that we see we are solidifying our base of growth that is quite resilient being on the above 15% growth levels. And I think we are clearly saying that we are aspiring to come back to and be above 20% net sales growth in the near term also. But the stability in the performance, I would say.

Then ARR-wise, double-digit growth with 10% growth of ARR. Q3 is a kind of a challenging quarter for the perspective that it is a vacation period, a bit of a slowness in July and August, meaning that a lot of the sales happens in the later part of the quarter, meaning also that for us to record ARR, that means that we have to have sold a contract and the customer needs to have started that contract.

So, in a quarter like Q3, when you tend to have, because of vacation reasons, more activity by customers in the later part, more sales there, meaning that activations of licenses tend to be at a higher degree than in a normal quarter than in the quarter after.

So, I think there is quite a lot indicating that we would see a bit of a better growth for ARR-wise in Q4, but absolutely good numbers with double-digit growth.

Gross profit, see here a 17% growth compared to then a 16% net sales growth. That, well, clearly indicates better gross margins in this quarter compared to Q3 last year.

That, I think, is something that we're quite pleased with given the fact that we have had a quite strong increase of hardware sales. I mean the number of shipped appliances are up 25% compared to last year.

That creates pressure on the gross margin. So, being able to grow it from 79.3% last quarter to 80.4% in this quarter, well, that means that we also have a good mix of profitable software contracts here in the sales mix, leading to a better gross margin and then also growing gross profit.

Which is if we then also look at the cost side of things and we look at the OpEx, well, this delta that we have now been demonstrating quite many consecutive quarters over and over, a stability in the growth numbers, OpEx being under control means that for the first time in the history of Clavister, our OpEx is in this quarter below 80% of sales.

It's at 77%, meaning we are growing with profitability. So, this delta of higher growth and significantly lower growth rate in our costs creates a better and better operating leverage for us.

So, looking at EBITDA, well, in this quarter, we landed with a 25% adjusted EBITDA margin, which is our highest EBITDA margin so far, growing that 47% compared to last year.

And those who participated in the Q2 presentation, you might remember that we were a bit displeased with the EBITDA margin in Q2. So, glad to see that the trend line is back with strength here coming in with, as I said, our best EBITDA margin so far.

The ambition is to go higher than that, but glad to see that the trend line is in the right direction. So, I think I will stop there and pass the ball back to you, John.

[John Vestberg, executive]

Thank you, David. We'd like to go through a little bit more insights into some of the characteristics of our base business, starting with absolutely on top of mind for many of our customers right now, and that's the new NIS2 Directive.

And I think everyone is probably aware of the NIS2 Directive, but I'll say slight repetition, this is an EU directive that has an ambition or has an aim to strengthen European Cyber Security or the level across the European Union.

Since the NIS2 Directive was established and now moving into concrete legislation in the individual European Union states, we start to see a much higher interest in Clavister products and solutions, specifically from 2 sectors, and that's the public sector and the energy sector.

If we look at the energy sector specifically and with energy sector, obviously, we're talking about the energy grids, the energy suppliers, the power plants and so forth.

Obviously, this is a so-called high-profile target industry when we look at cybersecurity. If you would like to paralyze a country or region, as a hacker or a threat actor, obviously, you would target the energy system.

That's clear. That's what we've seen happening in Ukraine and in other parts of the world as well. So, this is an industry that is gearing up for more and more cybersecurity investments. What are the key drivers?

Well, obviously, the geopolitical situation is one of the drivers, but also another driver being the so-called converging technological environment. And what do we mean with that? Well, practically, in most of the energy systems across the globe, there is quite an advanced far-reaching installation of systems within the so-called OT domain, Operational Technology domain. These are control systems that essentially control the daily operation of the energy grids.

Now, what's happening over the past few years and increasingly so right now is those systems being connected or opening up to more open or Internet-based systems.

And you will have a practical challenge then. You have older systems that are inherently insecure being opened up to public Internet, which is, of course, a hotpot for attacks. So this, by all means, is opening up or increasing the attack surface for hackers.

You might recall in previous reports that we talked about Clavister starting to also expand on our solution offering, looking at our existing technology base or our software IPR base and forming new packaging solutions that would address specific problem areas in the market.

OT security is one of those areas. So, we are now offering or launching a new Clavister solution, the OT security solution that is specifically addressing those challenges, cybersecurity challenges that happens now when OT systems are being connected to public Internet or to more insecure systems.

Our first specific product in this area is the Clavister NetWall 200R. So, it's an industrialized product running our standardized software from Clavister. So, that means that with very small marginal cost or marginal investments, we are able to then leverage the platform we already built, but making small market adjustments to make it relevant for the OT security market.

In the quarter, we had the opportunity to win a first customer contract on this solution, and that is for a very large European energy provider that sees these type of OT security challenges in their network. Initial order value around SEK 2 million.

So, as David alluded to, it's a mid-range type of order. It is expected to grow to around SEK 10 million. So, it's absolutely a key customer for us and especially fun, of course, that it's in a fairly new domain for Clavister.

Moving over to defense. We have received quite a lot of questions over the time regarding NATO to what extent NATO would be helpful or not for Clavister. I think as a conclusion to that, an overall conclusion is that NATO and Sweden's membership in NATO is indeed a key catalyst for us and for our sales.

I think one of the key events that happened in the quarter was the NCI agency's decision to include Clavister products in their NATO information assurance product catalog. What is this?

Well, this is essentially an internal product catalog by NATO. And whenever a NATO member state or a NATO organization by itself, needs some kind of a security product, they turn to this product catalog and looks at what are the products that are already approved by NATO. And obviously, this is a way to simplify and to streamline the selection of suppliers for NATO.

So, this is indeed a very important [indiscernible] for Clavister to be included in future projects related to NATO. Looking at some concrete wins in the quarter within defense. We announced earlier in the quarter a defense systems manufacturer.

We're not able to disclose the name, but they are a major one operating in multiple European countries. They are producing a number of different defense systems and one of them, which is being produced in Southern Europe, has now decided to integrate the Clavister software into one of their systems.

It is a software-only deal, and that is, I think, an important distinction from what we've seen from, for instance, BAE Systems so far when we are combining hardware and software.

And I think we alluded earlier to the fact also that even though we have somewhat lower gross margin on our combined hardware and software sales, for instance, to BAE Systems, our expectation has always been that we will have, over time, a fruitful mix of products also within the defense space with, for instance, pure software sales that will adjust or positively compensate the gross margin.

And I think this is a good example of software license deal with obviously a very high gross margin for us. The growth potential with this specific first deal with this customer is, of course, increased volumes, the number of specific system instances they are building has a direct correlation with our sales.

And we, of course, have a great expectation to also expand with this cooperation into other systems that they are producing. They are producing some 50 different systems of different kinds. Also, within the defense sector, we were able to secure a deal with the Defense Ministry of a NATO country.

Again, this is where we see that the Swedish NATO membership and the inclusion in the NATO product catalog is important for us. So, we were then selected to provide our identity and access management solution to ensure authentication and identification of all the workforce of the civil defense of this NATO country.

Initially, it's an order that covers a few thousand of users. It is expected to scale to over 100,000 users over some 36 months.

So, given that this is also a pure software deal, it is a recurring deal. It is a very good foundation for future stable ARR for Clavister. So, we're expecting this deal to reach SEC in annual recurring revenues after the scale-up period.

Then we have, of course, the existing defense contracts that we have won already, and they continue to be delivered as planned. So, we see no significant at least, no delays in any project plans and so on. Worth noting is that the large contract that we won with BAE Systems as of end of last year is following project plan.

It does not show any impact on our P&L. That's worth noting so far because the serious deliveries is starting to happen during 2025, during mid of 2025. So, that's worth noting that lead times and so forth, but the project is running according to plan.

Moving over then to telecom or 5G business. You have been following us for a while knowing that the 5G business overall, the macro perspective has been quite chilled. There has been restructuring in our larger telecom companies of the world.

And we haven't really seen a concrete growth or a tangible growth for a while in the 5G business. We concluded in earlier reports that we did start to see some signs of recovery, but the rollout pace of new 5G network, especially the stand-alone networks where Clavister Solutions is predominantly included, that those build-outs of those networks still was at a very slow pace.

Now, finally enough or good enough, we were, in this quarter, able to sign our first new 5G security win for a while, especially fun that it is actually for a Nordic mobile operator.

So, it's a home market win, if you like. It is part of a larger service contract through Nokia. So, Nokia is our partner in this. And this operator are building a completely new 5G mobile network, and it is actually one of the first commercial stand-alone networks being built now in the Nordic region. So, that's, of course, extra fun.

If you recall from our business model for telecom, we charge our customers based on the data usage or the capacity of data. So, even though this order initially is modest, it's SEK 2 million, but it follows our standard business model and it's recurring.

So basically, as the data from the operators' customers continue to increase. It means also increased license fees to Clavister. So, it's a highly scalable model and the key takeaway, it's a new 5G deal.

Whether this is a breakthrough or not for our 5G business, that's, I think, still to be seen. We have to be honest with that, but it's at least an important new flag for us to win.

Also worth mentioning, we disclosed a business opportunity in this area valued at SEK 20 million to SEK 40 million in mid-June. We had to disclose that due to regulatory requirements.

That is a deal that is neither won nor lost. So, it's still open for final decision by the customer. And, of course, as soon as we have a decision, we will announce the outcome.

David, if you would like to talk us through the financial ambitions.

[David Nordstrom, executive]

Yes. So, you know that we have an ambition for having a 20% or above average sales increase for the years 2023 to 2025.

We're at 16% in this quarter, so a little bit below the trend line, but the trend line, I would say, is improving. There is, then some more to do in Q4 and in 2025 to reach that target, which we're determined to reach.

Gross margins, as we said, 80.4%, so we are a little bit above target even though a lot of hardware in the sales mix, which is good for future software sales. So, happy with that.

EBITDA margin comes in at 25%. So, I would say significantly above the target. And we see operational cash flow in the business and being at EBITDA, EBIT positive is, I think, a clear indication of this moving to operational profitability, which then supports operational cash flows.

I stop there. Back to you.

[John Vestberg, executive]

Thank you. I think most of you who have been with Clavister for a while, you recognize these bullets. But for anyone being new to Clavister, we start seeing, of course, a larger interest for Clavister given that we're improving our performance quarter-by-quarter.

But as a repetition, the market we are operating on is noncyclical. I think that's important. It's seasonal, however. So, many IT or tech companies we see Q4 having the strongest quarter, although the seasonality is less than in some other companies absolutely that will be favorable. Of course, the geopolitical tension, how sad it is from a human perspective, it is, for sure, driving the market for cybersecurity.

Worth iterating is that all Clavister business is based on our own proprietary software with very high margins at the base. We include hardware packaging, for instance, our new OT security product, which is, of course, an adopted hardware that is well designed to be sitting in a power grid or an unfavorable environment, if you like. But as core of our business is our proprietary software.

With the customer base we've been building up, we have of course, a good mix. We have the blue-chip customers, the high-profile customers that are great to work with, BAE Systems, Nokia are 2 examples, of course. But also, as I think David alluded to, a big solid base of much smaller customers that are recurring and that are constantly building up and growing our revenue base.

The business model, especially since we changed our business model from our perpetual sales model back in 2021 to a recurring term-based model, it is a much more stable, much more predictable model, and it's also much more scalable.

So, as of today, the majority of our sales bandwidth can be spent on winning new deals, growing business with existing customers rather than repeating business with already won customers.

And the financial profile, of course, with the business model is highly attractive. I mean when we sell pure software, we are close to 100% gross margin.

When we package with hardware, for instance, the one in the picture, we can still maintain a very healthy 80% gross margin in average. I think the strategy platform that we've established over the past years with an increased focus on a fewer European markets only and a fewer industries within what we refer to as mission-critical applications.

So, in our case, public sector, energy, telecom and defense, that type of focus is really helpful in us maintaining a focused strategy and driving sales growth for the company.

And last but not least, of course, a highly motivated team with decades of experience and a lot of ambition to really drive this company to a highly successful one.

So, with that, leaving back to you, Jenny, for Q&A.

[Jenny Ramkrans, executive]

We have actually received a few questions. So, I will begin with the first one.

Can you talk a little about your new packaging of the product? What has the reception been?

[John Vestberg, executive]

Absolutely. Yes. If we just zoom out and look at the broader perspective to understand also explain why we're doing this.

We have at the heart of Clavister, a very competent, very powerful technology platform. So, software that has been incrementally developed and augmented and expanded over many, many years.

That's super good from one perspective, meaning that we can solve very many problems for our customers. The challenge that we maybe have seen in the past has been that it is a Swiss Army knife of functionality, and that makes it quite complex to sell and to convey the sort of the key selling points and the key reason and the key values of the product.

So, in order to become more relevant and more viable for our main customer groups, we decided some time back to make sure that we have more market-adopted solution packages around our technology, it makes it much more clear, and it makes easier for our own sales team, our partners and our customers to really grasp the key values.

So, there are a number of solution packages happening. OT security is one of them and the first one that we are taking more public to the market right now.

The reception has been good. The fact that we were able to quite quickly land a big deal already in Q3 is, I think that's a testament to that. I think for the ones who are interested in the details of OT security, there is a very good OT security blog. I think we can potentially post links to that one on our social media, otherwise, just Google it.

And you will see within very soon review of our product on that blog. So far, the reception is very positive. The conclusion is that the fact that our technology is so powerful makes the product and the solution stick out on the positive side towards other OT security vendors.

With the improvement that you could do similar things or the same things with the product also before, but then it was sort of mascarated in a bigger palette of many functions, and that made it a bit hard to navigate. We believe that these types of solution packages will make it much more crisp and clear to both sell and buy.

[Jenny Ramkrans, executive]

You have previously mentioned that you want to grow the base business and those ARR by 20%. You are some way from there now. What's your view on this?

[John Vestberg, executive]

The ARR is a direct function more or less of our net sales growth.

And as of current, our recurring revenue is around 70% of our total business, and that has increased quite significantly over the past years, of course, since we changed the business model.

We will never be at 100% because we have perpetual sales in the mix, we have hardware sales in the mix, we have some professional services engagements as well, which we do not count as ARR.

So, I mean, growth rates from ARR will slowly but surely pick up. There is a lag. There is a trail because of lead times that David mentioned, contracts being started later and so forth.

I think if we look at the pure net sales trend, where we have the ambition of growing it with 20%, we've been going from single-digit growth to double-digit growth to be some quarters above 20% and a few quarters below 20%.

We've been exposed to some headwinds in currency, obviously, because we're selling in both euros and U.S. dollars as well and that in some quarters, of course, has a negative impact on the growth rate.

My personal belief right now, if we look at the trend, if we look at our pipeline, it should be possible to continue this trend with increased growth rates. And if that continues according to our plan, then the average growth might very well be on par with that 20% target.

Still to be seen. I mean that's one more year to go and 1 quarter more to go, but I believe we have good chances to meet it.

[David Nordstrom, executive]

Yes. Just adding one thing. I fully agree with what you say. But in the question, as I read the question, I understood it from Jenny phrasing it, not reaching a 20% growth target on ARR.

That is not true because we have not expressed that as a target. We've said the target is growing 20% net sales, we're very near that target. ARR, as John says, it is a lag, and that will, of course, as net sales grow, it will grow with it, but we have not expressed the 20% target for ARR.

So, there is no misunderstanding there, just clarifying that part.

[Jenny Ramkrans, executive]

I will move into the Defense solution. Can you talk a little about how your pipeline of defense business has developed during these years?

[John Vestberg, executive]

Absolutely. I mean if we start on sort of helicopter perspective, looking at sort of what our aim is, what our ambition is. Cybersecurity market in defense as such, we're looking at a multi-multibillion dollar industry.

That's the overall market. Our addressable market, however, is, of course, a bit smaller, still very big for Clavister to address. We have deliberately selected a smaller niche within the defense market, and that's the niche that we refer to as the tactical defense market, essentially equipment, computers, soldiers, soldier equipments that are on the field.

Basically, we're not talking necessarily about data centers in Army headquarters. I mean we could serve that as well but in our defense business we're looking at the tactical security.

That means security that gets integrated on defense platforms such as the CV90 or competitors to the CV90 or other technological systems that are on the tactical field level. So, that's our strategy.

So, we've come the furthest with BAE Systems, of course, because we started with them earliest. We have secured the design win with them that turned into a framework contract, which turned into a first commercial contract for the Dutch Army and subsequently into contracts for the Slovakian Army and the Czech Republic Army.

And it's no secret, it's public in the media that BAE Systems is zooming in and soon to be contracted for also shipments to Sweden, to Denmark and to Ukraine.

Naturally, us being part of the design, we have high expectations to be included also in those types of deals. So, that's sort of the strategy.

Moving then over to other opportunities within defense. A part of the strategy is to continue to drill within the existing contracts that we have established. So, of course, with BAE Systems, keep in mind that the CV90 is 1 out of perhaps 30 different vehicles that are produced by the BAE Systems Group.

So, a natural next step for Clavister is to continue to explore other systems, other platforms within the same group. So, that's ongoing.

Moving outside of BAE Systems, we announced a design win last year with General Dynamics, European Land Systems. This is a fairly fresh design win so we still have some mileage to cover until we see concrete business coming out of it. But we have secured a design win whenever there is a concrete program happening, Clavister has a good likelihood to be included in those defense programs.

Recently or quite recently, we announced a system win with Thales, a memorandum of understanding with Thales. Thales is the major French defense technology group. And specifically for them, we announced that we will have our software included in one of their systems, the [SUTAS] system, which is basically the tactical communication system for vehicles, soldiers and so on.

It's a system that has been sold to Sweden, to Brazil to, I think, maybe 20 or 30 nations. And similar to what we've been doing in all other defense cases, it starts with some kind of a design win and then moves into subsequent commercial processes.

And that's where we stand with those. And then as you've seen in the quarter, we have been able to announce concrete deals with other platform manufacturers, systems manufacturers.

Unfortunately, I cannot announce the name or disclose the name, but customers, producers that are on par from a system and complexity point of view with BAE Systems and General Dynamics and those alike.

[Jenny Ramkrans, executive]

Any chance that you get a foot into the U.S. defense ecosystem in the future via a partner?

[John Vestberg, executive]

Absolutely. I mean, from our own sales and marketing perspective, it's very clear that Europe is our focus market. So, we are not talking about establishing a Clavister footprint with our own cost base in the U.S., absolutely not, not in near term anyway.

But, of course, as for instance, BAE Systems is an international company with a lot of operations in the U.S. and a lot of systems being produced in the U.S., it's a natural step for us to explore those opportunities.

And just as one example on that specific note, we were invited by BAE Systems to their international supplier fair at 2 times already this year, one in Minneapolis and one in Detroit just recently to explore if there are any other vehicles or systems within BAE Systems where our technology would fit, with quite good interest.

And, of course, early days, but good interest. So, I think the answer is, yes. We can absolutely be part of the U.S. defense system, but through partners.

[Jenny Ramkrans, executive]

David, can you talk a little about the debt side and how you intend to pay it off going forward? Is it possible to early amortize the EIB loan?

[David Nordstrom, executive]

Well, yes. So good question. As you know, the majority of the debt consists of debt to EIB, the European Investment Bank, back since 2017 with a EUR 20 million loan that has been amortized a bit.

We have renegotiated that repayment plan around this time frame last year during Q4, landing on a significantly better amortization profile for Clavister, giving us time to build our cash flows, extending that duration of the loan back into 2028.

Then, of course, with the successful rights issue we did at the beginning of this year, we sit with a strong cash position.

There are 2 warrant programs associated with those shares, TO8 and TO9. TO8 matured now in end of September, leading to an inflow of cash in October of gross roughly SEK 50 million, depending on how the share price evolves, but we think there is a fair chance of good possibilities to landing at least SEK 50 million or possibly more in with TO9 in March next year.

That gives us an ability to repay the EIB loan ahead of plan. And, yes, it is possible. So, our aim here is to finalize agreements with the EIB to do accelerated repayments on the back of the TO8 cash injections and then again, on the back of the TO9 cash injections.

And this is in line what we communicated in the prospectus before the rights issue. And my view is that EIB and Clavister has the same view that is beneficial for all parties to do voluntary repayments.

And this is in line what we communicated in the prospectus before the rights issue. And my view is that EIB and Clavister has the same view that is beneficial for all parties to do voluntary repayments.

So, yes, then it takes a bit of time. EIB is a big institution, but I'm positive that we will land on a good agreement between the parties here and then, of course, get back and update everyone on that as soon as possible, of course.

[Jenny Ramkrans, executive]

What kind of growth in OpEx should we expect for 2025?

[David Nordstrom, executive]

Well, that's a hard question to answer with a lot of detail. But put it like this, we have been successfully bringing OpEx down and then having OpEx under control with only small growth.

As we also write in the report, one of the bigger contributing factors to increasing OpEx is actually the ongoing legal situation with the company Fortinet AD, which we believe have infringed our IPRs. That is something that is impacting OpEx for this year with quite significant amounts for us, explaining a big part of the growth into next year, we will continue to grow EBITDA and EBIT. That's very important for us. But of course, also to create long-term growth for Clavister.

So, I believe we will see some more OpEx growth in 2025 than we've seen in 2024. But on the condition that growth is there, paying for it. So, it will be OpEx growth. It will be tightly connected to driving more growth. And before we add and onboard more OpEx, well, the condition is that we have more growth paying for that, driving EBITDA and EBIT improvements and, of course, cash flow.

So, John, anything you want to add on that?

[John Vestberg, executive]

No, I think that's a good summary. So strategy, OpEx under control, I think that's key, but [indiscernible] to invest in growth drivers, but selectively doing so.

[Jenny Ramkrans, executive]

We continue there. What does the duration of the order book look like in terms of scheduled deliveries for 2025, 2026 and beyond?

[John Vestberg, executive]

The majority of our order book relates to defense contracts because that's where we see the prolonged projects.

With the current order book, we have a horizon until approximately 2029. So, it's quite extensive. And if we would hopefully then soon to be add more defense projects into that, we would be seeing extensions up until 2030, probably 2031, maybe even.

[Jenny Ramkrans, executive]

To reach 20% CAGR for the years 2023 to 2025, you will need to accelerate growth to around 30% for 2025. Is it possible to do this? And what will drive that growth for you? You talked about this earlier. Maybe an update here.

[John Vestberg, executive]

Yes. I think we could break it down into what are the sort of concrete growth drivers that can contribute to that type of growth. And I mean, to start with where we just ended a significant order book that will drive net sales growth, and that is on top of the type of business that we are generating as of today.

So, that's one clear growth driver. Another one is what David alluded to going through the numbers where our base business has moved from quite slow growth in the past to be significant growth today and where it is all coming from an installed base with, first of all, recurring business, which is very important because what it essentially means is that our sales team and our partners can focus entirely on driving growth.

So, every single hour spent by our sales teams are geared against growth, not against maintaining business. That's a very important change. Then, of course, you have the macro perspective, the growth drivers that are impacting cybersecurity industry in general, like, for instance, NIS2 Directive that we just spoke about or geopolitical tension that drive defense budgets and so forth.

That's another key aspect. So, I don't know, David, if you would like to add something. But I think in general, there are many co-insiding growth drivers that all can help stimulate that type of growth.

[David Nordstrom, executive]

Yes. I agree fully with what you say. I can add, I think one important thing which you said, what has been driving growth for us now this last year, why is the growth trend higher? And there's one more thing, except all the things that John said, we are more focused meaning that we have salespeople much more actively engaged in certain verticals, building pipeline.

So, the pipeline that we carry with us now compared to the volume of our pipeline a year ago, it is higher. And we also build more and more specialized skills in engaging with customers in certain verticals where we are more likely to land the meeting and that meeting then is turned into also a commercial win.

So, we engage with more and more organizations, and we are also specializing more and more, meaning, yes, we talk to more relevant customers, and we are more likely to convert those conversations to actual deals. So, I think that's important also. A better pipeline with us.

[Jenny Ramkrans, executive]

Back to defense solution again. Has any competitor a comparable offering like Cyber Armour combining AI and firewall for the defense industry?

[John Vestberg, executive]

Not really not that we have seen because it's worth mentioning, worth noting that the segment that we are targeting, the tactical security within defense, it's, first of all, a quite new segment.

The digitalization of equipment on the battlefield has just recently started. BAE Systems was one of the early adopters, if you like, with highly digitized platforms, but everyone is following. So, it's happening.

That type of market is niche to the extent where although it's huge for Clavister, it seemed quite small compared to the civilian enterprise firewall market, for instance.

So, our large typical American incumbent competitors like Palo Alto or Fortinet or the likes, they don't place any particular interest for them, quite small niche market. So, it is a big opportunity for us.

The fact that we have both the AI and the firewall component and the associated sort of technologies that we bring in, identity, for instance, that is quite unique. We have not seen any commercial packaging that is similar from anyone else, to be honest. Of course, there are firewalls. Of course, there are small data diode components and so forth. But the complete package, no, we have not seen that yet.

[Jenny Ramkrans, executive]

We saw that you got a grant from [indiscernible] to develop Yam encounter measures for drone deployments. Can you elaborate on that news?

[John Vestberg, executive]

Yes. This goes few years back when we won a beauty competition, if you like, with the Swedish Defense Material Administration, where they selected our AI technology as a runner-up technology or interesting technology that could be used for various kinds of deployments within the Swedish defense forces.

At that time, it was used in that project for detecting anomalies on satellite or on defense or military satellite communications. So, essentially communication between the Swedish defense satellites and the land systems controlling them.

And we were very successful demonstrating that we could, our technology could essentially distinguish between noise in the traffic that was induced by an attacker or weather-induced noise.

And that's quite capable and realizing that in the past, you had specific dedicated signal analysts, people that were basically looking at data, data recording after the fact and spending days, even weeks to try to analyze what happened.

And now we could demonstrate that with technology, we could detect that in real time and take action in real time.

This project that we recently announced, that's to be seen as kind of an extension of what we did before. it's the Swedish defense forces being one part of it.

It's been over being another part, and we're working with another industrial player to combine this. And at this stage, we're looking at drones and making sure that we can protect drones from jamming.

So, it's a very similar technology. And the reason is, of course, to prove our viability within defense and to expand our footprint in defense and expand our footprint with the Swedish defense forces.

[David Nordstrom, executive]

Yes. And I think one thing to think about also because that depicts the difference of the Clavister AI, the effectiveness of the algorithm that it can run on a device like a drone.

It does not have to sit in a massive data center somewhere crunching a lot, a lot of data using massive CPU power. It can sit on a drone, and that says a lot about the efficiency of our technology. I think that's something to think about.

[Jenny Ramkrans, executive]

John, what are you most proud of this quarter?

[John Vestberg, executive]

I mean, obviously, the fact that we finally were able to reach positive EBIT. I mean that's been a goal for a very long time for this company.

So, I mean that goes without saying. But I think more scratching the surface below that, the fact that reaching that came from not a single one-off deal that happened to push us over the threshold, but rather from consecutive quarters of hard work following a strategy and maybe this is a cliché, I'm sure it is. It's a teamwork.

It's sort of the consequence and the result of a team that's been following a strategy now, been focusing and now we start to be able to see the positive consequence of that. So, I think that's what I'm proud of.

[Jenny Ramkrans, executive]

David, anything you would like to highlight?

[David Nordstrom, executive]

Yes, it's more or less a copy of what Jan said. But adding a little bit, I mean, we set out a plan in the autumn of 2021 to turn Clavister profitable. And we said back in 2021, we will reach EBIT positive numbers in the second half of 2024, and we did that.

So, I think it's the result, as John said, of hard work for quite a long time period to set Clavister on a different course, and we are bang on that plan. And I think that is something I'm proud of.

[Jenny Ramkrans, executive]

And with that, I would like to conclude this Q&A session. Congrats on a great quarter, and thank you, John and David, for participating here. Thank the audience for participating. Thank you.

[David Nordstrom, executive]

Thank you, Jenny.

[John Vestberg, executive]

Thank you. Thank you, everyone.