Micro Systemation AB (publ)

STO:MSAB B

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Peter Gille, executive]

Okay. Good morning, everybody. My name is Pete Gille, and I'm the acting CEO for MSAB. I've been that now for a month, but I have previous experience from being part of the Board for almost 4 years. And I also have a long background as a CEO, among that 9 years as a CEO for a similar security, IT security company as MSAB.

Today, we have -- we would present the interim report and we have an agenda where I will do a short introduction and then our CFO, Tony will go through financials. And after that, I will do a more deeper update and then we will sum up and then there will be questions -- possibility to answer questions. And if you have questions, it would be great if you could post them in the chat and we will bring up them at the end.

Okay. So let's get started. Looking at the quarter, it was not a good quarter when it comes to sales. We had a net sales of SEK 79 million, which is a weak quarter overall with some regional variations then. From a negative point of view, EMEA was the region where we didn't perform well. However, we consider this to be more of a timing issue. We have not lost big deals, but there are a number of projects that happened last year in this quarter that will not happen this year, but they are -- they will happen later. So if we're looking at the full year, we have a positive view. I will come back to the sales later in the presentation.

Our gross margin is significantly improved and that is I think we are working with very hard in the company to improve the margin and not sell so much hardware, instead focusing on software. This is also the main reason why the full effect of the decline in sales doesn't go through to the EBIT. So we have the improved gross margin that compensates partly for that. And then we also had a reversal of restructuring costs and better cost control in the company. So the EBIT lands at minus SEK 3.5 million then compared to SEK 2.7 million positive last year.

The cash position in the company remains strong. And we also have a small positive cash flow this quarter, even though we have the negative EBIT results. So that's a summary and then I will leave the word to Tony to go through the financials.

[Tony Forsgren, executive]

Hello. I'm Tony Forsgren, the CFO of the company. Let's see at the financials for the quarter then. So as Peter mentioned, we have a net sales of SEK 79 million, compared with last year, it's a decline actually of 24%. If we exclude the FX effects, we have some small improvements in the SEK versus other ForExs.

So we had a adjusted decline of 25%. Gross margin, we're working hard with. We have had no major hardware sales during the quarter. Compared with last year, we had a big one in the Americas of SEK 70 million. That's why the gross margin improvement is significant during the quarter. We ended up at 95%. I think that's an all-time high gross margin within the company compared with 84% in the isolated quarter last year then.

During the quarter, we also made a cost translation of the former CEO of SEK 4.8 million that is located in the personnel cost, which ended up on SEK 54.7 million. Also worth mentioning is the one-off costs. We did a reservation in Q1 for restructuring of the development department. That one is finalized.

We reserved SEK 15.2 million, but when finalizing and summing up the end of the results of that restructuring, we reversed and put back SEK 8 million. Why was there such a discrepancy between the reservation and the final cost then? There were people joining other positions within the company. And also there were some people leaving when they knew that they were at risk. So we reversed back SEK 8 million.

Average FTE in the Q2 is SEK 184 million compared to SEK 190 million last year. And if we talk about EBIT, we ended EBIT at minus SEK 3.5 million. But if we adjust it for an alternative EBIT with a one-off in the restructuring cost put back, we had an EBIT of minus SEK 8.2 million. I will come back to the SEK 9.2 million number, which is in the parentheses.

The balance sheet. We keep on having a strong balance sheet and closed the cash position at SEK 130 million, even though we had a dividend paid in May of SEK 18 million. And worth mentioning also is the restructuring cost and the one-off costs made in the books. We still have SEK 15 million in cash to put out from those reserves, even though the cost is fully booked.

So in summary then, APAC and Americas are somewhat below in the quarter, but looking at accumulated half year 1, we have had a good sales development in these regions. APAC is up 90% and America is up 45%. EMEA has had a weaker quarter compared to the other regions, which partly is due to timing effects and the way we recognize revenue where we take about 85% of the revenue day 1 of the deal regardless of the length of the contract and the rest is distributed over the contract length. So timing and the revenue recognition has affected the quarter isolated in Q2 then.

Continued focus on OpEx per FTE and we see a really positive development in these efforts. The one-off items have had a positive impact in the quarter where we put back SEK 5 million. The corresponding quarter last year, we actually had a one-off as well as we had a resigning CEO where we have a one-off cost of SEK 6.5 million. So taking last year's EBIT and adding SEK 6.5 million is where you end up with the SEK 9.2 million to compare with the minus SEK 8.5 million.

The company continues to have a strong underlying cash flow despite the negative result. We keep on continuing focus on working capital, which contributes to the positive cash flow. Dividend 1 was paid in May of SEK 18 million and we expect to pay the dividend 2 in November of SEK 9 million. Peter?

[Peter Gille, executive]

Okay. Thanks, Tony. So going back to the sales for Q2 then. There were some of the projects, the big projects that we had last year in Q2 that we didn't have this year. The reason for that is partly that as Tony mentioned, we had some contracts where we actually did a 2-year contract. We have 2 of these and they will not show up this year because they are a 2-year contract.

So they happened last year and they will not happen this year and they will renew the next year then. So no loss in customers, but also no big projects this year in Q2. Then we also had a big hardware contract last year's quarter, which we didn't have this year, which also wasn't really a big profit project, but it will not happen.

And then we have some delays in our projects. Some postponed in U.S., there are some -- we are waiting for some decisions. We are very positive towards the U.S. and we think we will see some significant development during next quarter in the U.S. We also have had bigger expectations for France, but we think that France will start delivering now also in Q3 and Q4.

So looking at the overall picture, we don't see that we are losing customers. We have a very healthy pipeline. So we are still positive if you look on the outlook for the full year.

As Tony mentioned, APAC is performing well and the U.S. is also on-track, if you look on the year so far then and looks even better. In EMEA, sales are on track in the Scandinavia and Eastern Europe and in the U.K., but in France and Germany, we are not seeing the development we want to see and we really want to keep focusing on them in the coming quarters. We see positive signs in France and we will work with Germany to get them back on track as well.

Also interesting to notice is that we have an increase in the -- our premium product, XRY Pro, which is 4x as expensive as our normal XRY, where customers are really buying more of the XRY Pro product. We also see from the military and the border side, an increased focus where there is a big demand for the products we have and we are also focusing on developing the products to fit better in the custom and the military sector.

So going forward the next 6 months, we really need to focus on execution and revenue results. But as I said earlier on, we have a positive view on the sales for the full year still.

I've been here for a month and I have some initial findings that I want to share with you. First of all, the forensics is a growing market, and I've confirmed my positive view on that also for MSAB. We have a lot of good opportunities in a number of different sectors in this market. We have already started to work on our portfolio before I joined. And we have some really, really interesting development coming up.

So new products that will be coming out in the coming 6 to 24 months. With that said, we are also doing a strategic review and looking at other industry segments and how we can adapt our products to also catch other revenue streams than we are addressing today. And I have big hopes also for this going forward.

So my initial findings is that I see -- I have a very positive impression from the business and the product development. We still need to focus on the execution and getting the products out to the market and also on the sales side of things, but we have every -- a lot of opportunities out in the market that we can catch.

So in summary, we are disappointed when it comes to sales in the second quarter of 2024, but we have a good pipeline for the rest of the year. We knew there are some delays in projects, and we are optimistic for the full year. The balance sheet is solid and our cash position is good.

We will continue to do the review of the strategy and we will continue and further invest in product development to be competitive and also to catch other revenue streams in the market, where we see a lot of good growth opportunities, but we need the right execution, of course, to execute on that. So that is.

Then it's room for questions.

[Unknown Executive]

Yes. We have one question already. Could you please dive a little bit deeper on the reasons for the weak EMEA markets? For example, nothing mentioned about the booming defense market. Are we losing existing customers or licenses in addition to slow new sales? Long question. EMEA.

[Peter Gille, executive]

Yes. So a little bit of more details on the EMEA market. And if -- first, I can also -- and the question if we are losing any customers, that's really one of the things I have deep-dived into and there are no signs of that we are losing any customers. So this is more about projects where we have signed multiyear agreements, products that has been delayed or projects that are in discussion, but didn't get closed this quarter basically.

So nothing -- we don't see any loss of customers. And the defense segment, the question was also how we are acting in defense segment. We see big potential in the defense segment and we also see big interest in the defense segment for our defense products. So that's one of the areas that we are focusing on.

And I hope we will see some positive development also in that sector going forward in the Q3 and Q4. And then coming back then to EMEA. Specifically, it was in EMEA we had the big projects last year in this quarter. In France, we now have the Olympics and we have a lot of things going on. So -- and we have won some big contracts in France frame agreements we haven't executed on yet. So we have big hopes that France will do a comeback in Q3, Q4.

In Germany, we need to look closer to the market and see why we are not performing in Germany. That will be an action that I will take during this quarter. So all in all, I think -- and the rest of EMEA is doing well. I mean, the U.K. is doing well. Sweden, Eastern Europe are doing well. So I think these are the isolated market that we need to rebound on. But we have, as I said, a healthy pipeline. We have a positive outlook for the rest of the year.

[Unknown Executive]

And then a question on the competitive situation. Has this changed as we mentioned in the annual report that cybersecurity companies and eDiscovery companies could become competitors for us, has the landscape changed in any way?

[Peter Gille, executive]

Now I've only been here a month, so in the CEO role, but I haven't heard anything about that it has changed. I think -- still think that can be a potential threat in the future. But right now I think we have the same competitors as we have had back in a time.

[Unknown Executive]

Okay. And then another question from [ T. U. Pershong ] regarding the global sales organization. Do you believe that this change impacted new sales in the quarter and initially decreased sales efficiency?

[Peter Gille, executive]

Yes. So the question is -- I think the question is the restructuring that we've done in sales, if that had impacted the sales in this quarter. So it's a kind of a effect from that reorganization and restructuring that we did previously on sales. And the short answer to that is no.

We don't think that's what has impacted. This is a few big projects that didn't came in, in Q2 and they have different reasons, but none of them seems to be related to the sales organization or the sales restructuring. So, no.

[Unknown Executive]

So far, we don't have any more questions.

[Peter Gille, executive]

No more questions?

[Unknown Executive]

Let's see. One more here. The Canadian order mentioned in the report, has that one been published before?

[Peter Gille, executive]

The Canadian order, it is a renewal order. So it is an existing customer that has renewed their contract with us. But it's one of the major projects that did come this quarter. So, yes.

[Unknown Executive]

Any other questions?

[Peter Gille, executive]

Then I think we will say thank you to all of you and I hope we can have a good presentation next quarter also when it comes to sales. Thank you.