Clavister Holding AB

STO:CLAV

Earnings Call Analysis

Strengthening Financials Amidst Growth

The company sees cybersecurity as an essential part of telecom, contributing to its growth prospects for 2024, amidst an optimistic yet cautious outlook. A vastly improved order intake, up 401%, including a substantial defense contract worth SEK 170 million, boosts their order book, with further potential to convert this into actual sales. The rights issue that concluded in January added SEK 170 million in liquidity and could bring an additional SEK 119 million with future warrants, aiming to reduce EIB debt significantly. Net sales grew 22% (25% adjusted for FX), with ARR up by 14%, although margins slightly missed the 80% target, reaching 77.2% due to increased hardware sales. Adjusted Operating Expenses (OpEx) decreased by 3% to SEK 41.5 million, with the cost optimization program easing off. EBITDA has grown due to sales increase, with interest expenses and FX causing volatility in financial items but showing an overall positive trend.

Prospects of Growth Amid Cybersecurity Demand

Looking towards a future increasingly concerned with cybersecurity, particularly in the telecom sector, there is a sense of cautious optimism for growth in 2024, escalating with the heightened awareness of cyber threats in the wake of events such as the hybrid warfare in Ukraine. Meanwhile, a substantial defense contract with BAE Systems reflects the company's expanding foothold in the defense arena, with deliveries and contributions to product enhancement slated for 2024, underscoring a significant pipeline in this business segment.

Stronger Financial Position and Performance Indicators

A sturdy order intake—rising by 401%, alongside a robust Annual Recurring Revenue (ARR) spike of 14%—signals healthy business vitality. Despite falling short of an ambitious margin target of 80%, attaining 77.2% is laudable, especially given the high proportion of hardware in the sales mix, which traditionally weighs on margins initially but lays groundwork for subsequent software-driven revenue and margin expansion.

Inventory and Operational Efficiencies

A high degree of hardware sales has reduced inventory levels, providing a cash flow boost. Further, the optimization in the workforce and consultant utilization reflects a transition to operational efficiency, as seen in a stabilized full-time equivalent (FTE) count and a nearly halved use of external consultants, thereby aiding in the company's controlled operational expenditure (OpEx).

Striving Towards Improved Profitability

With an eye on future profitability, the company is plotting a course towards a 20% margin target and is set to attain a positive operational cash flow for the entire fiscal year, suggesting disciplined financial management and a strategic pivot towards sustainability.

Streamlining Product Offerings and Client Focus

Rooted in their two primary product areas—Next-Generation Firewalls and Identity and Access Management—the firm is poised on a stable foundation with SEK 120 million in recurring software licenses, mainly servicing public sector entities and increasingly, the energy utilities sector.

Capital Strategy Reinforces Financial Stability

A successfully executed capital raise substantially exceeding the base scenario has endowed the company with a larger cash reserve, alleviating the need to pay out guarantor fees in cash and thus improving the capital position. This strategic move is expected to pave the way for a cash flow positive business by 2025 and the management's contemplation of larger debt repayments than contractually required reflects confident fiscal planning.

Projected Path of Growth

As the narrative comes full circle, the executives project a clear path towards intensified growth. They signal that the growth achieved so far is merely a milestone, and the company is anticipated to embark on a trajectory to higher growth rates, aiming to eclipse the growth achieved in 2023 by the next year.

Earnings Call Transcript 2023-Q4

[Kate Linwood, executive]

Good morning, everyone. Welcome to our Clavister Q4 2023 interim report presentation. My name is Kate Linwood, and I will be your host for today's session. And with me today, I have John Vestberg, our CEO and David Nordstrom, our CFO.So we will start today's presentation by John showing some insights on the -- business insights on the last quarter, and then David will elaborate on the financial figures. And after the presentation, we will have a Q&A session. So please write your questions in the Q&A box throughout the presentation, and then we will be happy to answer any questions you have at the end of the session.And yes, so with that, I would say let's hand over to you, John.

[John Vestberg, executive]

Thank you very much, Kate. And again, welcome, everyone. Before dwelling into the specific quarter, I'd like to start off with just giving my views on the full year of 2023. That's one of the nice things with the Q4 that allows us to give a 1-year perspective as well.The ones who've been following Clavister for a while knows that when we set out for 2023, we had two clear goals for the year; one, to pursue continued growth with a growth agenda, but at the same time, working hard with our cost base and our margins. And I think looking back at 2023, what we've been achieving is exactly that. So we've demonstrated a growth rate increase, which I will come back to. And we've seen the leverage that has resulted or yielded in terms of our bottom line.We see from a market perspective, obviously, that the dire situation in the world continues to be a strong demand driver for cybersecurity. There has been a number of recent cyberattacks that have put cybersecurity on the agenda. Recently, Clavister has been in position to talk with decision-makers, politicians on quite high level within the Swedish society. And it's very clear that cybersecurity is nowadays an [ awared ] aspect of the EU political situation.If we look at the businesses at hand, we have our base businesses, in other words, our Next-Generation Firewalling and Identity and Access Management business, which continues to be a strong, stable business for us, and we see growth in both areas and maybe more importantly, an increasing robustness that partly comes from our transition to a recurring revenue business model and partly because of changes we made in our operations.If we move to the telecom business, there's been a tough market sentiment for telecom in the world during last year and the year before, to be honest. And from our perspective, we have been able to sustain the business. We have not taken a hit per se, but we haven't seen strong growth either. So more of a flattish situation in our telecom business. In our defense business, one of our strategic growth business is, obviously, we see the increased traction again driven by the geopolitical situation and the increased budget spending within national defense. Here, a lot of traction, but also key wins that I'll come back to.In terms of numbers, looking at our net sales growth, we were able to see a full year growth of 13%, that's 3 percentage points up from the previous year. This means that our growth rates are increasing, obviously. We're not yet at our decide rate, though. So this is a milestone, it's not the end destination in terms of our growth rates. One key aspect of our business, which I already mentioned, is our annual recurring revenues coming from our subscription-based license business. And for the first time, we passed SEK 120 million of recurring revenue. So that's obviously out of a SEK 160 million business in total. This clearly serves as a very, very good foundation for the business going forward.Our EBITDA numbers and here coming back to my initial comment on the bottom line leverage. 2022, our adjusted EBITDA demonstrated a minus SEK 5.3 million result, whereas in 2023, we were able to drive this to plus SEK 20.9 million, so clearly, a significant uptick of our bottom line.Then further down the P&L, of course, the interest rates that continue to be challenging on the market as well as the weak Swedish currency, which has improved towards the latter end of the year and beginning of 2024, of course. But if you look at the average 2023, the currency and the interest rates combined has pushed or placed quite some burden on our financial net.That is 2023. If we then look at the specific quarter Q4, we had a fantastic order intake growth, 401% growth, of course, unseen in Clavister history. This is driven to a large extent, of course, by the big defense contract that we won, which I'll come back to, but also from growth in general. So even if we would adjust for the large defense order, we still see a 20% order intake growth, driven by business in general. So order intake has been a good metric for the quarter. The defense contract, I'll get back to that in more detail soon, but it's obviously then, as communicated already with BAE Systems Hagglunds and amounting to SEK 170 million. So by far, exceeding the largest contract size ever in Clavister's history, very important milestone, obviously, for us.If we look at net sales, Q4 was a solid growth quarter, one of the best net sales growth quarter ever for Clavister. And maybe even more important was that there was no single deal or single business that stood out or that was extraordinary strong. It came from all business areas and worth emphasizing even the -- even with the new defense contract with SEK 170 million, none of that affected net sales growth in Q4. It's all forward-looking growth coming from that contract. So this is basically a very solid growth number.If we look at our operating expenses, we have some further reduction that is visible in Q4. And with that, I think it's safe to say that we have been approaching what we would like to see as a new baseline level for our operating expenses. We don't expect them to deviate material from this new level. And David will come back and talk more about that in detail. The adjusted EBITDA margin, 14%, a significant improvement, but we'd like to emphasize as well that 14% is by no way the end game for us. This is a milestone, but we are, of course, targeting higher profitability levels going forward. During the quarter as well, we announced that we had arrived at an updated repayment plan with the European Investment Bank. This is something that was further finalized and contracted in Q1. David will talk more about details, but a very important milestone in Q4.Looking at the individual businesses then, starting with the base businesses. So again, encompassing our Next-Gen Firewall business and our Identity and Access Management business. Both areas, strong sales growth, both areas showed positive momentum in both our reception on the market and the demand. It's a business that's similar to our other businesses is, of course, driven by the geopolitical situation for good and worse, of course. It is an increased demand. And if you recall, we have been deliberately targeting customer groups within mission-critical applications, so critical infrastructure, public sector and so forth. And those customer groups are primarily -- or they are definitely hit by the geopolitical situation and see the increased demand.Just recently, a couple of weeks back, Sweden was subject to a massive cyberattack that hit one of the largest IT providers. There are still consequences and ramifications of the attack and nothing -- not everything has been remediated or stabilized yet still 7 weeks after. Following that attack, there's been additional attacks on municipalities on state agencies and so forth. So it seems that we are experiencing a new wave or a new level of cyberattacks, driven to part, of course, of the hybrid war, part of the war in Ukraine, but also a general new level of cyberattacks driven by different factors, political and financial motivations, obviously.In the quarter, we had a high volume of hardware platform shipments, substantially higher than the previous Q4. And as you might recall, given our business model, this has a temporary negative impact on gross margins. David will come back to the actual levels. But I think we're sustaining gross margin levels quite fine anyway, but keeping in mind that massive hardware shipments have a temporary impact on gross margins. That then is tied to the software contracts that we always attach to hardware deliveries, which in turn has, of course, a much higher margin on that revenue.Again, I mentioned the annual recurring revenues. So by passing SEK 120 million. Also important to mention is that these recurring revenues are distributed over quite a big base of customers and partners. We have no single customer being above 10% of our total revenues. So that's that contributes to stability, of course.And then moving over to telecom. Is there a recovery on the market or not? Well, if we start in the Clavister business, the Clavister perspective, we saw an improvement of our telecom business in Q4. So quite -- actually quite a good order intake growth in Q4. We still need to keep in mind, though, that we're coming from fairly low levels in the telecom business. So we shouldn't be overemphasizing that growth. But anyway, it's a good indicator.What we see, however, on the market coming from analysts, it's a bit of a dual or a split message here. On the one hand, analysts continue to point out that the macroeconomic situation poses some challenges for mobile operators also going forward for this year and next. Interest rates, of course, have dampen the investments in new core networks and new technologies, that's clear. On the other hand, some analysts, they point to some areas that are beneficial for the telecom suppliers. For instance, Nokia, which is a key partner to Clavister.So we are sort of cautiously optimistic about the telecom business knowing or realizing that the cyber threat in mobile network is real, very real, and it's been demonstrated even more closely with the hybrid warfare in Ukraine, where telecom networks were one of the initial targets and continues to be an initial target for any type of war. So cybersecurity is needed, we believe that our telecom business will contribute to growth in 2024.Moving over to defense. Key news, obviously, from the quarter is the significant defense contract that we signed with BAE Systems. We had announced the negotiations preliminary before. And it -- the actual contract ended up with SEK 10 million better than what we preannounced. So we took the contract from announced SEK 160 million to SEK 170 million. The contract includes BAE Systems procurement of our Cyber Armour product. So that's essentially our firewall product for integration in defense platforms. In this specific contract, it's being used in the CV90 platform for two European end customers basically to armed forces in Europe.The prototype work is already started and the pre-series deliveries will happen in 2024. As part of the contract, we are also upgrading our product to make it more powerful, more fit for the purpose. And apart from the series deliveries, then we are also providing consulting services, a smaller part, though, but consulting service part of the contract to support the customer with design and rollout and integration. This is then, of course, on top of previously announced contracts, the series deliveries on those contracts continue according to the plan. So we had deliveries last quarter or quarter 4, and those will continue in 2024 as well. The pipeline in defense is significant. We believe that we will have the opportunity to convert more business from that pipeline to real orders in the near future as well.With that, I'm leaving the word to David on the balance sheet.

[David Nordstrom, executive]

Yes. Thank you, John. So we launched our rights issue, our units issue in December 2023, quite late in the quarter with the assistance of ABG with [ them we're able ] to improve our liquidity position and to facilitate a debt reduction going forward. And this was a successful event where when it was concluded now in January, it was fully subscribed, which will then lead to a gross amount of SEK 170 million of liquidity before transaction costs. So a very important event to strengthen Clavister going forward.Equally important here as the rights issue was fully subscribed, it means that all the associated warrants in the transaction, hence, the unit transaction are now out in the market, which then means that there is a possibility. Let's see about the likelihood going forward, but it's a possibility that we will generate another gross SEK 119 million from these two warrant programs, one strike in September this year and the other in March next year. And that was to combine are SEK 119 million. So this has the possibility to strengthen our balance sheet significantly going further. Going forward, and what we have said is communicated in prospectus that all of that will go to reduce our debt with EIB.What also important in -- during the quarter, we agreed on the terms, as John said, for an updated loan agreement with EIB that was signed early February now in 2024, meaning that there is a new, longer and better repayment plan with EIB where the loan is extended by 24 months, where the repayment profile is better aligned with our own cash flows. So the repayments for especially the year is '24 and '25 are roughly EUR 13 million lower in the new repayment plan compared to the old one. So that is, of course, very important that we can -- now billed cash flow in the coming years to handle the debt and that together with the rights issue creates a foundation where our balance sheet becomes much stronger.But then looking at the financial metrics. So order intake, as we have said, increased with 401% and BAE contract was, of course, a very large driver. But important still, that is a good underlying growth of roughly 20% in the quarter. So we see that even without the BAE deal, order intake growth was quite good.ARR grew with 14% and here creating a better and better foundation for growth for us. I think this is important now when we look into 2024 and onwards that we go into the year with a higher level of ARR, which creates a better foundation for net sales growth and a bigger order book that will now help us grow our P&L in the year we're in now.Net sales growth of 22%. We had -- during 2023, we saw an ever weakened Swedish krona, which grew our net sales a bit more, but that turned in Q4 with some FX headwind instead. So if you adjust for FX effects, actual growth was 25%.Margins here, we have said for quite some time that we have a margin target of 80%. We didn't reach that fully in the quarter, we reached 77.2%, but saying that, it was with a lot of hardware in the sales mix, also more defense-specific cyber armor hardware, which has a negative impact on margins on day 1. But it is a good thing that we roll out more hardware because then we can tie a software contract to that hardware, and that will generate very good margins and growth going forward. So this creates the foundation for more sales going forward. So I think the -- given the fact that we grew significantly better in Q4 than compared to previous quarters in the year, as I think maintaining a margin close to 80% is actually quite strong.OpEx, we have some impact of nonrecurring costs, but that is small, only SEK 0.3 million compared to SEK 0.8 million in the corresponding quarter. Adjusted OpEx land on SEK 41.5 million compared to SEK 42.8 million, so a small decrease of 3%. And I think we can say here that John alluded to this earlier also in his presentation that we see that the effect of declining OpEx is now easing off. I mean we launched the cost optimization program back in the Q4 in 2021. The program became larger than we initially anticipated, and that has contributed with lower OpEx and EBITDA growth for quite some time. But our view is that we are now establishing a lower baseline of OpEx, but we don't expect it to decrease further from the point where we're at now. But we will still maintain a strong focus on cost, of course.We see the trend in EBITDA. The continued EBITDA improvement continues despite the weaker gross margin due to hardware more hard in the sales mix. So that's important. And the biggest driver for EBITDA growth there is sales growth. So OpEx reductions has been a high driver for EBITDA growth in previous quarters. Now we see that, that support is easing off a bit as cost reductions are landing on a new level, but then sales is then, of course, glad to see that, that is the main driver in the EBITDA increase.Financial items are -- with cash impact, this is something we always have to distinguish between since it's not all our interest to EIB are not cash interest. Quite a lot of it is added to the debt and repaid when the debt is repaid in full. And parts of the interest costs are cash interest paid in the quarter. So we saw quite a big increase continuing the trend from Q3 where increased interest rates or impacting cash interest of up from SEK 2.8 million to SEK 4.6 million. So this is then impacting also our cash flows.But then we see quite large revaluation effects as the Swedish krona strengthened versus the euro in Q4. So the actual financial items are actually positive from -- up from minus SEK 22.3 million to plus SEK 0.2 million. And this I think is a testament to the volatility in our financial items due to a large loan in euros. So we are very sensitive to both interest and FX effects. So this is what we see here.Some words around, especially the balance sheet and cash flows. CapEx investments are in line with previous periods. I think there's a stability here where they are maintained on a level of around SEK 10 million. Amortization has been on an increasing trend now for quite some time, driven by a couple of -- mainly 2 factors. One, factor number one, we have had some higher tech investments if we -- the latest 2 years compared to the period before that. So that, of course, is impacting gradually impacting amortizations. That should stabilize as tech investments on growing. And then we change our accounting principles sometime back going from 3 years with amortization to 5. And that also has a gradual impact on a buildup of amortization, but that is also landing on a normalizing on a new somewhat higher level than as a consequence.Cash flows are improved, as I said in the previous slide. We don't get the full positive EBITDA effect in -- we don't see that in our operational cash flow before working capital changes due to increased interest rates. So that's the -- that is holding us back from seeing the full benefits of increased EBITDA, but the increased EBITDA has an impact of noncash flow, but not the full.Good support from the balance sheet with especially a tight control over accounts payable created a good support here for our cash flows in the period, so did our inventory, as we saw very -- only very small deliveries to our warehouse, but a high degree of hardware in the sales mix, meaning that the inventory levels decreased quite good in the quarter, which gives a good cash flow support. We're buying some more cash in accounts receivables, which is natural trend-wise in Q4 as this tends to be a strong sales quarter, which then has an impact on accounts receivables. This is in line with what we've seen in previous years.We had a bridge loan in this quarter of SEK 20 million as part of the rights issue. In hindsight, we -- that was a bit on the high side as cash flows became -- tended out to be stronger in Q4 compared to a risk scenario, and that bridge loan is then now repaid in Q4 as the proceeds from the transaction or landing on our bank accounts.And looking at the FTE number, it is stabilizing around the 100 markets we have been saying before. We have reduced the number of external consultants quite significantly from 21 down to 12. And this is also one of the explaining factors as why we see our OpEx coming down. Well, we are transitioning -- we can -- we use them in the cost optimization program for lower balancing and that as we have now stabilized the movements within the numbers of FTEs, we can also reduce the number of external consultants.We can also shift out some consultants in favor of our own staff for -- I mean, two reasons. We rather have on staff than consultants if we can choose. And it also comes with a lower cost. So this is -- I think we don't expect the number of external consultants to reduce drastically from the amount that we have now. So I think this is -- we're looking at a stabilization here both in the terms of FTEs and a number of consultants.

[John Vestberg, executive]

Good. Thank you, David. So if we then look a bit ahead. Now we have a new year started, and we will look at these -- the outlook for the new year and for the years coming. Of course, to be able to make a proper outlook, we need to look backwards as well. And clearly, what I started talking about was a year where we've seen good bottom line leverage and good bottom line improvement coming from both growth and the cost and margin focus we've been having for the past year. The market continues to be in favor for companies like Clavister, European cybersecurity providers in general. So that's no change either, rather on the positive side, we see more awareness, and we see more demand coming up.If we look at the sales growth, what we anticipate is to continue our growth trend basically then saying that for this year of 2024, the growth will increase over what we saw last year. We maintain our 3-year outlook that started last year. So we remain the 2023 to 2025 outlook with 20% of average growth over those 3 years. In terms of OpEx, just as David alluded to, we have an OpEx baseline or an OpEx level, which we should maintain strict cost focus going forward as well. So the OpEx levels will be on par with what we had last year, which means that we are, of course, maintaining a strict cost focus even in -- especially in these times of high inflation or continued high inflation. We see if the inflation comes down during the year further, but clearly, we are committed to keeping a flat OpEx.In terms of bottom line then, the EBITDA margin for last year or for Q4, as I mentioned, that was a milestone. We anticipate that the margin will increase. So we're looking at 20% margin target and a positive operational cash flow for the full year.And with that, we'll leave it over for Q&A.

[Kate Linwood, executive]

So yes, thank you very much, John and David for sharing your insights. So it's time for the Q&A session. So we have already received a few questions, but please feel free to write them now in the Q&A box. You can find that where the question mark is on the right-hand side of the screen. So yes, let's dive into the first question we've received and that's regarding cars and cybersecurity.So the question is, by some regular cars sold in the EU and England will have cybersecurity in them. Is Clavister positioned within this segment? And if so, what would that look like? What does that look like?

[John Vestberg, executive]

Yes. No, I mean it's absolutely correct that there are new regulations -- for instance, one regulation coming from actually the United Nations of all bodies, but placing strong demand and strong requirements on cybersecurity also in civil vehicles or personal vehicles. And that goes beyond civil vehicles also to commercial vehicles. Technically, Clavister's products and Clavister technology would be suitable for that market. But coming from the position where we need to realize that Clavister is still a small vendor. We need to pick our battles. We need to focus to be as successful as possible. We've chosen deliberately to focus on the defense industry, under defense platforms, sort of risk and also implicitly then have the highest spending budget. So the sort of the shorter answer is, yes, technically, we could. But commercially, we have decided not to position ourselves in that market.

[Kate Linwood, executive]

Okay. Thanks for sharing those insights, John. If we stay in the defense area then, so we've got a question regarding our partnership with General Dynamics. So can you please give an update on the cooperation with General Dynamics?

[John Vestberg, executive]

Yes. Absolutely. So as a reminder, we started a dialogue with General Dynamics, and this is the European branch, European launched systems out of Spain, some time back, which eventually led to a so-called design win, which we were able to announce mid last year. That design win essentially means that General Dynamics have evaluated our technology. They have seen the demand for cybersecurity and they have also publicly announced that they are gearing up together with Clavister to fulfill that cyber requirement.If we make an analogy with our work with BAE Systems, it's very similar coming from initial dialogue, initial specifications, moving over to a design win and then moving over to a actual contract and then subsequently moving into actual business. So I would say we are sort of in the midst of that process with General Dynamics right now, meaning that we have come quite far, but we still have some distance to walk until we see commercial orders coming from that.

[Kate Linwood, executive]

Okay. John, so if we stay within the defense area, we've also got a question regarding the future of BAE Systems. So you see this -- do you see the larger deal from BAE Systems just as a one-off one? Or do you expect additional orders coming from BAE in 2024?

[John Vestberg, executive]

Yes. So what we have been accomplishing is over quite many years, is moving from, again then from initial requirements to design win to a framework agreement where our products are technically well integrated into the CV90 platform. With the latest contract, we have now 4 European nations for armed forces, if you like, that are indirectly then customers to Clavister using the Clavister technology as part of their CV90 fleet. There are in the market official communication from BAE Systems and from other armed forces about their intention to procure either additional vehicles or completely new vehicles to their fleet.Naturally, as we are integrated in the vehicles, we hope -- we anticipate that we can be part of those orders as well. So that's our belief. And there are, of course, within the bigger BAE group, additional possibilities for us to move from the CV90 rather complement with additional type of businesses. But it's absolutely not a one-off.

[Kate Linwood, executive]

Okay. That's good to hear. We've also got a question around on that deal. So how much of the SEK 170 million is for contract, subcontractors?

[John Vestberg, executive]

So the -- out of the SEK 170 million, it constitutes a number of things. First of all, the product development part, as I mentioned, that's a smaller part. The serious deliveries, which is the absolutely main part and then some consulting services. The single component that we source for these products are the hardware component. And it's no secret that we procure them from another Swedish company called MilDef, I think everyone is familiar with MilDef. So we chose a Swedish subcontractor deliberately to keep to our security by Sweden positioning, especially important in this segment. We are looking at approximately SEK 80 million to SEK 90 million of cost of goods sold for those products.What we have not been able to announce yet, but it's a natural component of all our defense contract going forward is the future aftermarket sales support contracts that these type of vehicles, they are designed to be operational for 30 years. And of course, our products then need to be operational for 30 years as well. So at the back of any serious deliveries to a defense customer, we can expect long-term support and maintenance contracts, which is then more or less a 100% margin business for Clavister.

[Kate Linwood, executive]

Okay. Could the recently accepted support package for Ukraine led to additional orders for the CV19?

[John Vestberg, executive]

That's absolutely in line with my previous comment that if there are actual procurements being made then from Ukraine of modern CV90s and again, we're integrated platform-wise in those. So we could anticipate that, yes.

[Kate Linwood, executive]

Okay. So yes, I think we've done - we've elaborated a lot on the defense business. Moving to different areas of our business, and we've got a general question. You stated that the base business was good. So what exactly does this base business consist of? And what is the main driver for that?

[John Vestberg, executive]

Yes, that's a very good question. We know that in our past communication, we haven't pushed so much on our base business, but it is a very, very important part of our business, hence the word based business. Practically, it consists of 2 product areas: our Next-Generation Firewall business and our Identity and Access Management business. In terms of customers and customer groups, we are mainly targeting public sector, meaning municipalities, county councils, state agencies and so forth. Those are one important customer group for us in both product areas. Second and smaller, but growing customer group is within the energy utilities sector with energy grids, local and regional energy companies and so forth.We have our base business conducted through partners, meaning through resellers and distributors. And naturally, those partners are able and there is no technical limitation or business limitation that prevents them to sell also to other customer groups. So as part of our entire customer portfolio, we also see a quite distributed customer range, ranging from the smallest SMBs to completely different type of customers. The Clavister position, though, with our own marketing efforts is towards the customer groups I just mentioned. The business is distributed over roughly 20,000 recurring contracts as of today, which again leads to a good stable foundation, SEK 120 million of recurring software licenses coming almost entirely from our base business.

[Kate Linwood, executive]

Okay. Thanks for sharing those insights on that side of our business as well. So we have so many questions around the capital, that is of course, that's been a topic for the last quarter. So let's look into these, and so we can share some more information on that. So do you see a reduced risk in your balance sheet based on the recent capital raise? That's for you, David.

[David Nordstrom, executive]

I think the short answer to your question is yes. Elaborating a little bit on that, yes, is -- of course. I mean I think we have -- it'd be fair to say that there is from two sources in Clavister. One is the operational risk, where I think we show more growth and the business in a good trajectory. That leads to lower risk, then we have the risk coming from our balance sheet that Clavister has, a quite substantial level of debt. That is something that we need to handle. We made a new agreement, as we talked about with EIB, meaning that we have a much better control over the liquidity outflow when it goes to repayment to EIB. And then the capital raise means that we are sitting with a significantly larger amount of cash being enabling us to do the turnaround fully of Clavister where we believe that we will have a cash flow positive business when we are in 2025 and we have the ability to handle our debt repayments over the coming years with the transaction that we made. So that was the longer answer to my short, yes.

[Kate Linwood, executive]

So dividend, you raised more cash than you needed to support this, John?

[John Vestberg, executive]

Okay. So okay, do we have sound again, we have some muting issues of the -- yes. Okay, good. So -- okay. So we said that our transaction that was guaranteed on a base scenario where we would get a roughly net SEK 100 million to handle our debt repayments over the coming years and also the cash we need to do the transition to a cash flow positive business. Now we managed to secure a larger amount of cash. From looking at the prospectus, we said a fully subscribed issue would give land around SEK 145 million. So that's significantly better than the base scenario, meaning that we have a bigger freedom on how to look on what to do with the larger cash buffer that we now generated.

[Kate Linwood, executive]

So what is the actual net outcome from the capital transaction?

[David Nordstrom, executive]

Well, that is not fully clear yet. I mean, we still have some costs from the transactions coming in. So we need to do our full calculation of that and come back to what is the exact amount, can say something and that is looking at the -- what we said in the prospectus, we would land on roughly SEK 145 million net. Then we managed to agree with the majority of granters that they would have their guarantors fee, not paid out in cash but in units or in shares and warrants, meaning that the actual cash outflow from the transaction would be a bit lower than what's communicated in prospectus. So a bit better than the SEK 145 million then. But not giving a clear exact figure because that is not visible yet.

[Kate Linwood, executive]

Yes. Yes. Understand. Will you amortized more than you have stated in the report?

[David Nordstrom, executive]

Well, there is no contractual obligation to do so. So what is contractually agreed with EIB is to repay roughly EUR 1 million more or less this year and a year after that. Then the amortization and repayments will increase over the years '26, '27, '28. But as I say, we are looking into and investigating what is our possibility to do a bit of larger repayments during this year, as I think we can come back to that, but this is something we are investigating.

[Kate Linwood, executive]

Okay. Yes. We have one last question relating to rights issue in that, is there -- do you have any comments on the excuse my Swedish, but [Foreign Language] the red flag on the rights issue?

[David Nordstrom, executive]

Yes. I think you pronounced that quite well. So we -- and this can be something to think about when you write questions, you can do that in Swedish, but Kate is a native German speaker. So it's easier if you write questions in English. So yes, we have been getting some questions around that, that these financial newspapers fully don't agree with the view of us and ABG that the subscription transaction was fully subscribed. And that is we landed on SEK 170 million by then having a majority of guarantors accepting the granters fee not in cash, but in units. And that's how we came to the fully subscribed level. That also means that we will have a better cash generation from the transaction as we are not paying out guarantors fees in cash, but we can keep that cash and they come in as shareholders instead. So I think that was actually -- from the company perspective and from a cash perspective, a better outcome. So -- but it's correct that we landed on a full SEK 170 million by transitioning some guarantors from cash to shares, which I think was a good thing.

[Kate Linwood, executive]

Okay. We have some questions around growth. So I'll illustrate them in to one. It's more or less around, could you please elaborate on the outlook for growth in 2024, more specifically, but also for further years looking into 2025 as well?

[John Vestberg, executive]

Yes. And I'd like to repeat what I mentioned in the outlook section that we are on a trajectory to higher growth rates. So the growth we've demonstrated so far is a milestone. We will see higher growth in 2024 over 2023. That's the ambition. And to be able to fully reach our potential, we need to step up from that growth level as well. So we're not giving guidance specifically so the outlook we have is what we basically comment on. So growth -- we expect our growth to raise. That's the answer.

[Kate Linwood, executive]

Yes.

[David Nordstrom, executive]

Yes. And can I add a little bit to that and repeat myself as well, I want to have the possibility. I mean, I think we can also look at -- since we have landed on a significantly larger order book, this large PE contracted on that will give some support to this year. Previous contract is scaling up, reaching full -- on a full delivery level during this year. So that would give more support. ARR has landed on a SEK 10 million higher level than when we exited 2023 than when we entered in 2023. So I think these things combined gives us a better level from which we generate growth. So I think we -- there's still a lot of work to do, but we have derisked our growth potential a bit since we have a better position from delivering growth. So that's a positive thing when we go into this year.

[Kate Linwood, executive]

Yes. Okay. We have a question regarding our IAM business. So how satisfied are you with the development at PhoenixID? And can you comment on the recent contract for a truck IAM, John?

[John Vestberg, executive]

Absolutely. So I mean the PhoenixID business is constituting our Identity and Access Management business. And again, that's part of our base business, which is both growing and provides more stability as we go. The recent announcement we made is it's a key win. We're not, for regulatory reasons, not able to announce or public the name of the customer. It's a significant truck producer. And I think it essentially shows that the technology that we produce, both in case of IAM, but also, of course, the defense contract for our Firewalls, just is a testament to that these type of very significant and large customers, they dare to place their security in the hands of Clavister. So I think that's what we can comment a good testament basically.

[Kate Linwood, executive]

Yes. Jumping back to the -- another question on the balance sheet and capital raise. So did the weak balance sheet in the past impact growth potential? And could you -- could that accelerate after the capital raise now, David?

[David Nordstrom, executive]

It is hard to give a very exact answer to that. But for sure, or we -- the weakness of our balance sheet historically and is still a challenge, but less so now. Of course, I think customers who look to, okay, have a strategic long partnership with Clavister and looking at the weakness of the balance sheet, that might hurt our business since customers might not choose to broaden our relationship with Clavister out of concerns about the balance sheet. And I think that was, of course, one of the reasons for making this capital raise was to reduce our operational risk. And I think we have seen some positive comments from different customers, a couple of large ones that, okay, this is a good thing. This enables us to deepen our collaboration.I think yes, it is important to raise cash also from that perspective to support our own business from, I think, the increasing the, say, the trustworthiness of Clavister as the stability of the business.

[Kate Linwood, executive]

Okay. So I don't see any more questions come in at the moment. So then I would have 2 final questions for the both of you, one each. So for John, what are you most proud of from the last quarter?

[John Vestberg, executive]

I think there's quite some good things to choose from. I mean, we're happy with the sales growth. We're happy with the margin outcome. But I think if I were to choses a couple of things, it would, first of all, be that all the areas, and it's not some extraordinary deal or extraordinary events that drove the growth in Q4. And then on top of that, of course, the significance of landing a massive defense contract because that provides stability in our growth numbers going forward, plus the testament of course, but we've been sort of approved as a vendor.

[Kate Linwood, executive]

Yes. So thank you, John. David, what your highlights?

[David Nordstrom, executive]

I would point to the fact that despite that we grew quite strong in the quarter, and with a lot of hardware in the sales mix, we maintain what I think is a strong gross margin of 77.5%. I think that shows that there is a robustness in the underlying business and that the level of active subscription contracts, the ARR can support our margin despite the fact that we deliver many new contracts and a lot of hardware, which has an initial negative impact on gross margins. So I think the gross margin turned out, I think, on a strong level in Q4. That was my --

[Kate Linwood, executive]

Thank you for sharing that, David. Yes, thank you both again for your sharing your insights today and answering the questions. Thank you, everyone in our audience also for asking so many questions today. That's been really good that we can also elaborate on that, and we're happy for everyone that joins and participate. So yes, thank you very much to all of you, and you will be able to find a recording of this webinar shortly on our website and also the report. And with that, and to say you all have a great day, and thanks for joining us.

[John Vestberg, executive]

Thank you.

[David Nordstrom, executive]

Thank you.