Clavister Holding AB

STO:CLAV

Earnings Call Transcript 2020-Q4

[Jenny Ramkrans]

All right. And welcome to Clavister Interim Report Q4 2020. I'm sorry about the high, we had some disturbances with the sound. With me today, I have our CEO, John Vestberg; and our CFO, David Nordstrom. John will first present together with David, the presentation with the financial results, and then we will move on into a Q&A. If you have any questions, kindly use the chat and write questions to me or use the Raise the Hand, and I will let you in and ask the questions on your own. But now moving to the presentation. Welcome, John.

[John Vestberg, Co]

Thank you very much. So welcome, everybody. My name is John Vestberg, the CEO and President of Clavister And we would like to guide you through our latest interim report for Q4 2020 and as well the full year summary for 2020. Obviously, we've had an interesting year behind us with combination of a lot of interesting progress in many areas combined with, of course, a challenging year from a pandemic perspective, which I think the entire world has been seen dominating. We have, as an executive summary for the fourth quarter, we've seen a revenue growth of 14% and corresponding number for 2020 is 17% despite the negative impacts we've seen, especially in the second half of the year from the corona pandemic. And I'm specifically talking about postponed larger customer projects, which have been moved into 2021. We have, as part of our ongoing progress and path to profitability, we've been optimizing our cost structure further. And we see the results of that in terms of significantly improved gross margins where we arrived for the quarter at 88%, which is a major improvement versus last year. We've as well seen reduced operating expenses both for quarter 4 and for the full year. As a net result of that, as a consequence of that, we've seen significant EBITDA improvements, SEK 4.4 million in peak quarter, and actually SEK 19.5 million for the full year. And that corresponds actually to a 50% reduction of our EBITDA losses for the full year. And that's obviously a very positive and major leap forward towards our profitability targets. If we look at order intake, specifically, we highlighted as well last quarter that order intake is a metric that is fluctuating by nature because of our current business. We have delayed purchase decisions coming from the corona pandemic that pushes down order intake in Q4. We have also in some product areas, challenging comps from Q4 2019, which also impacts the number. For the full year, however, we are up 8% on the order intake metric. We are, however, carrying with us from the previous parts of the year an increased order backlog. So when we ended the full year 2020, we had increased our order backlog by approximately 11 million to a level of -- short above SEK 20 million. We have as well a very strong funnel buildup within both our 5G security solutions and with the defense vertical. And finally, as a summary, our operating cash flow for the quarter and for the full year have been significantly improved with SEK 11.1 million for the quarter and SEK 51.4 million for the full year. If we then move into some key events in the quarter and shortly after the quarter. As you might have seen already in our public communication, we announced after the quarter ended the largest deal to date for Clavister, and this is within the defense vertical. What we have here is our first end customer win which is a major Western European military organization, and this end customer was won together with the partnership we have with BAE Systems, a partnership that we announced back in June last year. And already at that time, we indicated that there is a strong funnel of end customer opportunities, and this is the first opportunity that has resulted in a commercial contract. The deal itself is part of a so-called mid-life upgrade where the customer is upgrading 122 combat vehicles currently in service, and there is an option for a further 19 vehicles to be upgraded. This corresponds to a contracted value, a minimum contracted value for us to SEK 50 million, which is the largest deal -- single largest deal for Clavister to date. And if we look at the long-term support, these type of vehicles are obviously expected to have a long lifetime at up to 30 years or even longer. So with the support and add-on options that can come on top of this deal, we see a potentially deal value increasing to even SEK 90 million. The shipments to this customer will start in the second half of this year. And the bulk of the products will be shipped from next year and up until 2024. So the bulk of the sales and the bulk of the revenue will be seen across those years. If we then look at what we are actually delivering to this customer as an insight into product end capabilities and design win, the product you see right now is the specific product we're delivering to this customer. So it's basically a ruggedized version of our firewall product, and this product gets then embedded into both military and all terrain vehicles for civil use. This product has been augmented with several new requirements, specifically with NATO requirements. And as such, the product is able to withstand not only cyberattacks, but also extreme environmental conditions and even significant physical attacks, including EMP attacks and similar. We have this product in 2 models, and both models are being shipped to this first end customer. The first model is our Clavister ruggedized Security Gateway 400, and this is a product that then ensures that only authenticated or cleared users and systems and protocols can connect to the vehicle itself and can be used within the vehicle's infrastructure. So this is sort of the center piece of the infrastructure. Besides that, we have a new design win also with BAE Systems. And as a side note for potential future deals coming through BAE Systems, this design win allows us to increase the deal size with approximately 25% for new designs or for new end customer contracts. This specific product is a ruggedized secure switch. So it's basically a smaller version of the security gateway, and it's being used to really create the entire vehicle infrastructure, network infrastructure more resilient and being able to separate onboard infrastructure systems such as weapons and cameras, battle command systems and even engine controls. So it's part of a very comprehensive vehicle infrastructure security.With this, we have as well a deal funnel, not only with BAE Systems, but also with other defense customers and some of these end-user opportunities or end customer opportunities, they have the potential to materialize as wins already this year. And I'm saying already because as most of you are familiar with, defense industry, in general, has very long lead times. So new deals within a year is considered to be fast moving. The opportunity value of each subsequent deal is in the range of SEK 20 million to SEK 100 million each. So you could see the first end customer deal as a very average type of deal within this context with SEK 50 million of deal value. Moving then into our 5G security and service provider business, where up until this date we have shipped our 5G security solution to more than 25 mobile operators. And those operators have been deploying what's called so-called non-standalone or NSA 5G deployments, meaning deployments where you have hybrid solutions with 4G components and 5G radio components in a mix. However, we had the opportunity to design or to secure design wins for so-called standalone 5G networks in the second half of 2020. With standalone 5G networks, this is the type of 5G networks which is designed entirely as 5G -- 5G core networks, 5G standalone networks. So this is obviously a very strong testament to that our 5G security solution is highly relevant also in the standalone setups. We have as well moved into the commercial rollout phase with some of our other partners within the service provider or 5G security field. Those include Tata Communications, our partnerships with Arm and Telco Systems. And from having been business development activities, we are now in a phase where we're jointly executing on some really qualified opportunities within this segment. Our ambition together with these partners is to secure commercial wins during the first half of this year, of 2021. As per the end of the fourth quarter, the funnel we have built up together with our partners within this vertical is actually our largest funnel to date. So we see some 20, more than 20 really qualified opportunities. And both from a size in terms of quantities and value, this is our largest funnel to date. In terms of 5G security and innovation, we are introducing a number of enhancements to our offering in 2021. Some of them are technical enhancements, for instance, something called containerization of our software. And this option, this deployment option, allows us to be part of so-called cloud-native 5G scenarios; basically, when you deploy an entire 5G network within a public or private cloud. This is a natural extension of the virtual capabilities that we've been leading with for quite some time. In parallel to that, we are enhancing the virtual capabilities, and we do this to support really massive capacity demands. In some of the deployments we have been part of so far, we've seen the scaling coming to a point where the next level of capacity demand is really entering the scenario right now. And we are adding virtual capabilities to deal with that. And that positions our product on the really forefront in terms of capacity and virtual capabilities.So that means in summary that our 5G security solution is really being enhanced to not only catering for virtual capabilities and virtual deployment scenarios, as has been the case in the past, up until recently. But we're also pushing the solution on dedicated hardware and recently then in the cloud with cloud-native 5G scenarios. We would also like to look a little bit now in the hindsight when 2020 has closed and see what the COVID-19 pandemic has had as the effects on Clavister and our business. This is a report or a forecast that Gartner, one of the key analysts, came out with in the mid of June last year, where in the beginning of the year, most analysts and the industry in general were quite convinced that cybersecurity market would stand out or the industry would stand out as one of the few industries not being affected by the pandemic, but basically being benefiting from all the new ways of working, the remote working principles and all of that. However, in the mid of the year, there was a massive downgrade of growth predictions. And if we look at a couple of areas where Clavister is active in the market, including and Identity Access Management and our network security equipment, basically firewalling products and similar, we saw that there was a slight increase of growth, slight growth expectations on areas related to remote working, for instance, Identity and Access Management, whereas on the other hand, network security equipment was actually predicted quite a substantial deduction or decrease in growth with minus 12.6%. And in the retrospect, it's quite easy to understand with several companies or most companies across the globe really fighting for survival during pandemic, there has been massive reallocations of IT and network budgets. And those spendings that originally were supposed to go into firewall equipment were instead shifted to remote working tools and features.So in summary, what we see from this as a result from 2020 is that within product areas that support remote working principles, for instance, Identity and Access Management, we have really seen a strong demand. And I think everyone is expecting these new ways of working and the new behaviors to continue in the future even after the pandemic subsides. And as such, we anticipate, of course, that these type of products and the demand for those products will just continue to grow. If we look at the network security product family, as mentioned, budgets have been reallocated and/or removed or postponed over the year. The good news is that we have suffered very few customer losses. We've seen customers postponing their decisions over the quarters and into the new year, but we've experienced very few actual customer losses, and this is obviously a good sign. So we have been able to demonstrate a sales growth within this product family, obviously lower than expected before the pandemic hit, but still a sales growth in the light of an overall declining submarket for the time being. Now we are expecting that this product family will pick up momentum once again once the budgets gets reallocated to their original purpose. So obviously, this is still at the base of it, a double-digit growth submarket if it hadn't been for the pandemic. There are a number of interesting evolutions happening as well in the cybersecurity market. Some of you might be familiar with an acronym called SASE that was coined by Gartner. It represents the next logical step in firewall and network security evolution. So originally, what used to be the pure firewall evolved into unified threat management with [Audio Gap] firewall, which has built the dominating firewall solution type on the market for some years now. The next step in this evolution is the shift towards SASE. SASE is, in short, Secure Access Service Edge. And in a simplified way, described by this graphic, where basically you combine wide-area networking or SD-WAN functionality, together with network security services into 1 holistic service. And this type of service is predominantly delivered from the cloud with components on site, but predominantly from the cloud. According to Gartner, this new concept is expected to gain a lot of traction within the next years. And by 2024, it's expected that over 40% of all the businesses will actually look at implementing the SASE concept. We have been launching to a limited set of customers already back in the early autumn of 2020. We launched a limited SASE solution or a pilot rather, to a selection of Clavister customers. And we've been running this pilot throughout the autumn. And on the back of the very good feedback we have had from this pilot, we have then decided to go full steam ahead and implement a full-scale SASE solution. We are doing this on the back of our existing technology platform, our Aurora Security Framework, which is, as you know, a proven technology platform, which means that we have the ability to add SASE concept as a revenue growth engine or revenue mechanism on top of our existing products without having to scale our R&D costs materially, and we're doing this based on proven technology. We are launching this in stages with the first stages in 2021. As a natural part of this transition is also a consolidation of business models. We've been running a number of dispersed business and licensing models over the years. And as part of a general transition into a more recurring revenue model, we are now consolidating these dispersed models into 1 unified business model. And this business model is based on recurring revenue structure and the Security as a Service concept. We are seeing approximately, on average, approximately 50% of our revenue today being recurring. But after the consolidation of our business models and after the completion of this transition, we expect this number to grow significantly and do so over the next 2 years. So by the end of 2022, we should see a materially larger part of our revenues being recurring. There are a number of benefits to why we're doing this. One is an increased total customer value. And associated with that is obviously an expected higher customer retention as well. We will benefit from the improved predictability from our revenue streams and as a natural result as well, we see higher margins. There might be a short-term limited impact on cash flows and revenue recognition, but that's only temporarily and quite a natural thing that happens when you transfer from one model to another. With that, I'd like to hand the word over to David.

[David Nordstrom, Chief Financial Officer]

Thank you, John. Hi, everyone. So I will build on the presentation made by John, but go a little bit more into depth in some of our financial items. So looking at our -- starting with order intake. I mean, it's a challenging figure compared to last quarter for 2019. I mean, that's partly due to COVID as we've seen a delay in customer implementations where we see deals not being lost but pushed down further in front of us. So we expect that to pick up going forward. We have also a challenging comparison quarter in 2019, where we saw a very strong order intake during that quarter last year. But we also see a need in order to grow our order intake, we need to invest in stronger end customer relationships, and we are gearing the organization in that direction to also drive a stronger order intake. The revenue in the quarter grew with 14%. We have seen some FX headwind in the quarter due to -- mainly due to the stronger Swedish krona compared to the euro, which had a negative impact in the quarter with SEK 800,000. It also had a positive impact in the corresponding quarter. So adjusting for that, the growth is 18%. The gross margins are strong in the quarter, and they are also substantially stronger for the full year 2020 compared to 2019. And there are -- 1 reason is obviously product mix. Depending on what we sell, the gross margin varies. It's stronger in some product families and a bit weaker in others. That's 1 reason. But one other important reason and that is looking back a bit historically. I mean, our solutions are mainly based on the technology provided and built by Clavister. But to deliver comprehensive security solutions, we also need third-party licenses from others where we incorporate IPRs from other vendors in our technology offering. So in the past, that was done by sharing parts of the revenue with the -- our partner who licensed the technology to us. And we have had for quite some time an ambition to renegotiate those contracts in order to move from percentages of our revenue to a flat fee. And that is also what we see here where we can lower our COGS by having flat fees, and that is also a very strong growth mechanism for us as added sales will not add further costs for licensing the services. So the more we grow, the more then the portion of COGS will be lower. So that's something I would like to highlight as a very strong profitability vehicle for us. So that's something that we're very proud of. OpEx is declining in the quarter even though that we are able to increase revenue. So this is, of course, a good thing that's supporting our EBITDA, not only through increased revenue but also that we see that costs from our operations are declining. And if we would adjust for nonrecurring costs in the quarter and in the corresponding quarter, the cost decrease is actually better, going from SEK 55.9 million to SEK 47 million, so we're having nonrecurring costs of approximately SEK 8.9 million in the quarter due to organizational changes. It's due to the fact that we -- during the fourth quarter 2019, we closed the office in Umeå and took SEK 6.2 million nonrecurring costs in that quarter last year. But we did not do a provision last year for the full-time lease of the office in Umeå as the ambition was to sublease that office. And I mean, you've all seen the effects of the COVID-19 pandemic of the demand on office facilities. So the ambition to sublease that office have been negatively impacted by the short-term lower demand for offices. So for that reason, the remaining lease of that office have been now recorded as a provision in this quarter with a negative offset of approximately SEK 3.4 million. So all in all, that's SEK 8.9 million. We have reduced our personnel costs in this quarter compared to the last quarter. So we have streamlined our organization so we are able to do more with less. So we have an increased efficiency in our organization where we -- with fewer employees are able to drive higher revenue, which is a positive. Looking into our financial items, we have very strong positive FX effects in the quarter due to the improved Swedish krona compared to euro. As we have quite large loans in euro, the EIB loans of EUR 20 million. We have seen during the entire year, and we will keep seeing that, FX effects hitting us between the quarters. And in Q4, we have a very strong positive effect from exchange rates. Looking at the financial items with an actual cash effect, those are SEK 3.3 million. And that's mainly our interest rates to the EIB loans and also loans to our bridge financing, which we repaid during the fourth quarter on the back of the share issues. So those -- the interest costs for the bridge loans will not be with us going forward as those are already paid. Some further -- so looking at our CapEx investments, they are declining compared to last year, mainly due to fewer FTEs in the organization as a whole and then also fewer FTEs working with capitalized development. So we had set out an ambition last year -- well, during 2019 to -- on full year lowering our capitalized development costs with 10 million and our decrease is actually above that, which is a positive thing, and it's also reducing our negative cash flow from investment activities quite substantially. We are, for the short-term perspective, aiming for having capitalized development costs that are in line with amortizations of intangible assets. And we see a decline in amortizations of intangible assets during the quarter and during the full year compared to last year as many historical capitalized costs are now fully amortized. So that's the reason why they are declining. From a cash flow perspective on our operational cash flow, it's positive in the quarter with 2 million. Cash flow for the full year from operating activities is also positive. So compared between the quarters, we are going from minus SEK 9.1 million to plus SEK 2 million and for the full year from minus SEK 43.1 million to plus SEK 8.3 million. And that is -- well, 2 reasons. One is we are increasing our revenue and we are reducing our operational costs. So the negative cash flow from our operations are declining. And looking at our working capital, we have been able to be quite conservative in our cash management and have, therefore, quite strong support from our balance sheet, supporting the cash flow in the quarter and the full year. We did acquire a set of IPRs in the end of the fourth quarter. These are IPRs that are already implemented in our product offering for quite some time, and they are -- several of those are vital components that we are supplying our customers with. So we have had third-party licensing costs for those in several years. Now we have purchased those and have the right to use those for free of charge, which has a very positive impact on our COGS going forward. So the ambition to keep lowering our COGS are also supported with this acquisition. The bridge financing has been repaid in the quarter. So we have moved from a situation in the beginning of this year, where we had loans from EIB, from Tagehus and from Norrlandsfonden. And in the third quarter, we repaid the loan to Tagehus as you all remember. We did that by paying with own cash of SEK 20 million and using bridge financing to finance the remaining SEK 35 million. And those SEK 35 million have been repaid in the quarter on the back of the share issue that we completed. And the number of FTEs have been reduced compared to last year. During the fourth quarter 2019, we closed the Umeå office, and that is the main reason to why we have fewer FTEs in the organization compared to last year. And we have had an ambition to not increase the number of FTEs in the organization substantially. We -- there might be certain needs to fill gaps in our competencies, especially in tech, where there are needs to further improve our technology platform. And there are, from time to time, competencies that we don't have in-house and then there's a need to recruit people to fill that gap. And that's one of the major reasons why we are increasing FTE. So would we -- as we have been using short-time working during the third and fourth quarter, when we isolate that effect, we would be at 138 employees, just to have even comparisons between the quarters and full years. Some comments of the share issue that we concluded during Q4. That brought roughly SEK 204 million in new equity to us and also SEK 204 million in new cash before issue costs. And in the prospectus and in the same presentation that we made in the third quarter, we said what we were going to use this money for, and now I just wanted to speak a little bit about what are we actually doing as of now with the financing received as a consequence of the share issue. So number one, it was -- we said that this will be used partly to improve our balance sheet. So we have then strengthened equity substantially and also have a significantly stronger cash position in the group now compared to last year, having been able to repay bridge financing of SEK 35 million and remove the entire Tagehus loan during this year. We said that this will also be used to finance and increase working capital. So as we are moving with an ambition to move into more larger contracts, the BAE contract is 1 example, we will temporarily increase our working capital in -- either in accounts receivables or in inventory. And in order to be able to finance that, we need more cash. So this is what it will be used for. It will also be used for -- in order to do the transition, as John spoke about, from perpetual license modeling to a more recurring revenue-based model. And that -- we anticipate that to have a short-term impact of cash flow as we move from payment up front to payment over the contract term. And this is something that we strongly believe in, will bring more profitability to Clavister, a stronger predictability of our revenue. We think it's more beneficial to our customers. And we have a solution that we believe is more sticky, but that transition needs some financing, and this is what we're going to use some of the funds for. We said that we'll do selected go-to-market investments. And what we are doing is looking at verticals where we see strong demand and strong stickiness for our solutions. Examples of this is in 5G. It's in attractive areas of public sector, it's in defense. So being able to successfully compete in these segments, we need to have, for example, training of our sales staff to be -- in order to successfully engage with those customers, marketing to support our messaging, for example, and some investments in sales staff with the ability to work -- who have experience of successfully working within these verticals. So these are investments that we are doing. And then it's the technology platform. As I said earlier, we don't foresee that we will massively increase our capitalized development as we are aiming for keeping it in line with amortization. But still, there is a need to finance those investments. And what we are doing is increasing our SASE capabilities, our SD-WAN capabilities, finalizing and improving the military-grade firewall with BAE. And also continue to evolve our offering around 5G. and the ambition to have a full cloudification of our platform and services is also something that we're working with during 2021. So this is a summary of what we are using the funds from the share issue to do. So over to you, John.

[John Vestberg, Co]

Very good. Thank you very much, David. To round off this presentation, we would like as well to provide you with our ambitions and the planning assumptions we are making for the short term, meaning 2021, and for the midterm, which is over the coming few years. And then as well in the long term. Our ambition for 2021 is, as a starting point, to continue to outperform the underlying cybersecurity market growth. So if we reflect on 2020 with the pandemic hitting the cybersecurity market as well. We had the -- still the opportunity to grow significantly faster than the underlying market growth and what we predicted back in 2019 for 2020. What this translates to in more practical terms, though, is that we expect to see an improved revenue growth in 2021 over 2020. So obviously, with the numbers fresh in mind with 17% growth in 2020 over 2019. This is the number which we aim to improve upon. Then as well for this year, given that we have now been taking several major steps towards profitability over the past few years and especially in 2020, despite the pandemic. The ambition is to reach sustainable EBITDA profitability level, which means that at least a minimum of 2 consecutive quarters of profitability. And from that point, not going back into negative EBITDA levels again. The planning assumptions we are basing this ambition on is apart from the revenue growth also, that we maintain our gross margins above 80% as you've seen in the reports that we have been able to do over the past many quarters. There will be variations over the quarters, again, due to the product mix and due to this transition to recurring revenue model as well. We aim to keep our OpEx on the same levels as for 2020. And we expect that potential impact from COVID-19 will still be controlled. There might be still hangovers from the pandemic, but there might be bounce backs as well in the later parts of the year, which will even out. In the midterm, of course, continuing to outperform the underlying market growth, that's clear. But we would also like to translate this into us growing our revenues with at least 20% on average over the next 3 years. And from 2022, we would like to be able to demonstrate free cash flow. So basically, that's our operating cash and investing cash flows to service our debts going forward. And for the long term, of course, we have all the tools in our toolbox right now in terms of providing both industry-leading profitability and free cash flow. So that's the clear ambition for the long term. So with that, we hand over for questions and answers

[Jenny Ramkrans]

Yes, thank you, John and Dave, for a good presentation.

[David Nordstrom, Chief Financial Officer]

Thank you.

[Jenny Ramkrans]

[Operator Instructions] Starting off with an easy question maybe or a soft question. John, what are you most proud of?

[John Vestberg, Co]

In the year or in the quarter. Well, if we take the full year perspective, the thing I'm most proud of is that despite that we had a situation where some of our predicted and even budgeted and contracted end customer projects were pushed out in time due to the pandemic. We indicated some of those already in Q2. Still, we have been able to grow our revenues quite materially or substantial actually in the full year and been doing so with a reduced cost level. So I think that's something to be proud of. And that comes obviously from the very committed work that has been executed in new circumstances as well, with people working from home as the dominant ways of working in 2020 with really committed partners and really committed colleagues and good support [ overall. ]

[Jenny Ramkrans]

Long answer, John. A question from a participant. As a bigger investor who does not invest in companies that haven't reached SEK 800 million revenue, when do you think you will reach SEK 800 million in revenue?

[John Vestberg, Co]

That's a very precise question, and obviously, something that is impossible to give a correct answer to. So I think we have to defer to what I just mentioned in terms of our ambitions that for the midterm, we would like to see the company continue increasing its revenues with 20% -- at least 20% year-on-year. And if we can continue that momentum, then we will reach quite significantly higher revenue levels over time. But obviously, we can't give a date.

[Jenny Ramkrans]

Are you experiencing the momentum now in 5G when Nokia and Ericsson is strengthening its market share, especially when Huawei is frozen out of most regions in the world.

[John Vestberg, Co]

Yes, we are. And as we alluded to both in the report and in the presentation, our funnel within the 5G and service provider area is stronger than ever. And obviously, with Nokia, Ericsson and even smaller, more niche players taking more market share on the back of not only that 5G is finally happening, but also the fact that Huawei has some clear challenges in some parts of the world, that absolutely strengthens our funnel and strengthens our competitiveness. So absolutely, yes.

[David Nordstrom, Chief Financial Officer]

And could we just add to that also that we are -- we have been able to move our technology delivery within 5G also to more platforms, not only virtual, but also hardware and with the aim to have containerized firewalls in place and up around for this domain, so we have been able to service more use cases going forward as well. So I think there's demand, but it's also our capabilities to deliver upon the demand have also strengthened, and we are moving into a -- with a stronger tech platform in 2021 than we had in 2020. I think we could add that as well.

[Jenny Ramkrans]

Further question. Can you please comment on the cooperation with Arm, Telco? What has been done so far? And what does it mean to enter commercial phase?

[John Vestberg, Co]

Right, so as a reminder for the ones who have not followed Clavister for a while, we were able to enter into partnership contracts with Telco Systems being 1 strong partner to Arm, the chipset manufacturer Arm, a strong competitor to Intel, obviously, for some use cases. And with several other system integrators in this field, in the solid driver field. And we did that approximately 1.5 years back and in some cases, a little bit longer, and in some cases, a little bit more recent. And since then, what we've been doing has been to build up our offering together with them, supporting those partners with various proof-of-concept activities with service providers, not only in Europe but also in U.S. And obviously, these are long lead time activities where you have Tier 1 or Tier 2 service providers who are basing new revenue streams on technology from third parties. There are long lead times of conceptualization and proof of concepts and verifications. A lot of that activities -- a lot of those activities were carried out in 2020, leading up to, in some cases, end customers wanting to move forward with their solutions, some customers delaying their decisions due to COVID. And with the partners mentioned, we have taken the step to move now to what we call a commercialization phase, where there are qualified opportunities with those selected end customers, where they've taken the step from early proof of concept or proof-of-concept stages to now looking at rolling out this commercially. So basically, we're in early phases of contract negotiations and commercial discussions.

[Jenny Ramkrans]

David, a question for you, I think. Can you please explain why personnel expenses and other external expenses were so much larger in Q4 than -- in Q4 '20 than in Q3 '20.

[David Nordstrom, Chief Financial Officer]

Yes, that's a very good question. I think in essence, there are 2 major things explaining this. One, In Q4, we have made some reorganization, which has caused some nonrecurring one-off costs in order to do that reorg. We have had the costs of finally closing the Umeå office, which also -- that creates a quite large provision of SEK 3.6 million in the quarter. There is also a -- we have introduced a warranty provision in this quarter as we have lots of hardware up and running at our customers, that we have not made provisions historically for warranties, which we have now introduced in order to mitigate potential risks of malfunctioning hardware. So these are a couple of reasons which we didn't see in Q3 as we did this in Q4. There are also the fact that Q3 is, from a personnel expense perspective, always our least costly quarter as we -- then offsets our vacation debt accruals. They are then released as people are on vacation, so they are reversed in Q3 which has a positive offset on personnel expenses. And you will see that in many companies in Sweden who have that same effect. So these are, I would say, the major explanations to the difference between Q4 and Q3, and I hope that answers your question.

[Jenny Ramkrans]

Thank you, David. Congratulations with the success on establishing the new segment with the order from BAE. If I understand it correctly, you are developing specific hardware for BAE. How does the new segment differ?

[David Nordstrom, Chief Financial Officer]

For those watching, we could just say that there are some problems with the screen. So when you type a question, we see only a fraction of it. So it takes some time to read it. So if you are wondering why it takes some time for us to answer.

[Jenny Ramkrans]

Meanwhile, I will ask a different question. David, if you can highlight just 1 item in the report, what would it be?

[David Nordstrom, Chief Financial Officer]

Being CFO and a former auditor, I would say that I like cost control. So the -- what we are seeing with our improved EBITDA, that is of course, increased revenue, but it also is contributed by the fact that we are controlling our costs. So I am very positive to the fact that we have -- we are able to demonstrate increased revenue at a lower cost. So I think that's a positive delta. And we are, of course, aiming going forward to keep as tight of a control over our costs as possible.

[Jenny Ramkrans]

Going back to the question. If I understand it correctly, you're developing specific hardware for BAE. How does the new segment differ regarding gross margin and recurring revenues?

[John Vestberg, Co]

Yes. So thanks, by the way. It's correct that the business with BAE and defense customers, in general, would typically include hardware components. We are sticking to our core business being a software company by not specifically on our own behalf, developing the hardware. So we're partnering with a defense specific manufacturer of hardware, just to keep our investment costs down and to keep to our core business. If we look at the combined offering and the combined product, this is very much in line with similar products that we have which includes hardware appliances that we sell, I would say, to our general enterprise customers. So from a gross margin and profitability perspective, it's very much in line and equal to what we have in general.

[Jenny Ramkrans]

[ Searching into ] the BAE order even further, is there potential for additional orders from BAE Systems, potential size or -- of the contracts?

[John Vestberg, Co]

Yes, there are, absolutely. So we -- as we stated in the report in the presentation, there is a sizable funnel. And if you had the chance to read BAE Systems' own press releases on their contract, they are also quite open with the fact that they are participating in several high-profile defense tenders, some in Europe and some in Asia and where our products are absolutely part of the design. And if we look -- and this is no secret as well, if we look at our domestic market, Sweden is the largest user of the combat vehicles that BAE Systems are producing. And those 500 vehicles that Sweden operates in comparison with this first end customer contract, which is 122 vehicles, then you see the difference in potential. And also what points to that direction is that many of the running or operating combat vehicles in the field right now have some years on them, so they are in need of upgrades. And if there is an upgrade, there is a fairly good chance that our products get included because of the new NATO requirements on cybersecurity.

[Jenny Ramkrans]

We have a raised hand. Forbes Goldman, can you hear me?

[Forbes Goldman, Research Analyst]

Yes. Well done to a nice quarter. I have 2 questions here. So you mentioned in the previous presentation for Q3 that you announced general availability with a technology partner. So I'm wondering a bit how this has been going and perhaps if you have started on the rollout? And also, when you look further ahead, how do you expect to increase revenues? Is it primarily with new customers? Or is it by increasing sales to existing customers? Because you do have a very diverse product portfolio.

[John Vestberg, Co]

Yes, so if I might actually start with the latter question then. We have a diverse product portfolio, but coming from a perspective where Clavister in the past was a single product company with a firewall product being the main business, as the market has evolved, and I think the SASE concept is a very good example of that. Most customers, at least in the enterprise space, are expecting security vendors to provide more holistic solutions rather than pinpointed individual products. So it has been a natural evolvement for Clavister to move from single product to a larger set of products, a product portfolio and transition that further into solution and as-a-service sales. So it's absolutely a natural trend that we're following. And if we then look at how are we looking to grow our business based on this, well, there are several things we're doing. We are continuing to really optimize the ways we're working and optimize our sales efforts. So for the ones who've been with us for a while, you might remember that back in 2017, we took the first step on focusing our customer focus to 5 end customer verticals. And we are now, with the improved verticalization efforts, limiting that even more down to areas which really fuels our funnel and really fuels our revenue growth. And so it's basically a combination of focus, more efforts into sales and an improved offering, basically, with us taking a position in the sort of modern SASE world as well. And we mentioned this in the report, although not in the presentation, that what we have been doing in the fourth quarter is also a quite substantial reorganization within the group, where a much bigger part of our staff is now part of a larger, more cohesive commercial department where the main and really only objective is to grow sales and grow profitability. So a long answer, to answer your question in where we will increase our business, but it obviously comes from many angles, many vectors. But at the end of the day, it's very clear that we are growing with more customers, and that's clear. On your first question, we announced general availability with a partner. And if I recall correctly, I don't have the report entirely fresh in mind, but we did that with a partner within the service provider vertical. And it is a partner that we've been working with for a little bit more than 1.5 years. They are embedding our software into their solution, and their solution is targeted towards SD-WAN service provider customers, Tier 1 operators basically providing SD-WAN functionality. And the last quarter of Q3, we announced their GA with them. And they have now started to commercialize this. They are pushing this, it's part of their offering to their customers. So during 2021, we expect to see revenue coming from this customer. I hope that answers your question, Forbes.

[Jenny Ramkrans]

One more question. Going back since 2017, the company have communicated, say, 30-ish CSP deals. What are the status of these deals? Is there revenues to be expected according to the model that the company earlier have communicated increasing over 5-years period?

[John Vestberg, Co]

Very good question. Thank you for that. So with those CSP deals, this comes back to what we presented as well in the presentation with, most of them has been historically with the so-called non-standalone 5G networks. Of course, not all of them have went into live or commercial operations. Some have been left in -- a few, I would say, have been left in R&D stage or pilot stages. Many of them, however, are in commercial operations. And we -- even though we are not announcing each and every single incremental deal or order that we see from those operators, we are continuously in the past quarter and over the full year and as well in 2021, seeing recurring license upgrades coming from those. As we've been painfully aware of, and I think everyone has been aware of that, the 5G rollout has been slower than most expected in the past. But nonetheless, they are part of our increasing revenue streams, and it falls into the model we communicated earlier, where new capacity demands results in new purchase orders to Clavister. So it falls in that line.

[Jenny Ramkrans]

I have 1 last question, and then we will round out. When do you think Clavister will be profitable?

[John Vestberg, Co]

Exactly as we mentioned now in our outlook or ambition for the short-term period. In 2021, our ambition is to demonstrate EBITDA profitability.

[Jenny Ramkrans]

Thank you both John and David, and all the audience for participating. Have a good day.

[John Vestberg, Co]

Thank you very much.

[David Nordstrom, Chief Financial Officer]

Thank you.