Micro Systemation AB (publ)

STO:MSAB B

Earnings Call Transcript 2023-Q4

[Peter Heuman, executive]

Okay. Here we go. Welcome, everyone, to MSAB's and -- MSAB and this earnings call for quarter 4, 2023. My name is Peter Heuman. I'm the fairly newly appointed CEO. I started here in October. And with me today -- I would normally have our CFO, Tony. So I have to confess to you that I have actually granted Tony on vacation, a well-deserved vacation during this hectic period. He's actually -- one of his good friends have just been going up into space, in a rocket from Florida. So I think it was once in a lifetime opportunity for Tony, who's helping me a lot here at my start in MSAB, so I provided him and granted him a few days of vacation. But he will be back very soon.

So during the call today, I will also try to be an acting CFO when we run the results, but I hope that's going to turn out okay. We are today using this live session through teams. So you can, during the whole presentation, if you have any questions, you can put them directly here in the application, in the chat function, and we're going to end the session with the Q&A.

So with me today, I have our newly appointed Head of Marketing, Kim Sjolund, and she is going to be here to help me with any questions, et cetera. And I think we have already received a few questions. But having that said, I think it's time to get started with the earnings.

So let's go to the next slide and run through our financials. And before I do Tony's work. I would like to say that from starting as the CEO in October, and then identifying the results for the whole 2023. I think it's a very strong financial year for MSAB. I'm not going to take any credit for that, since I've been here for a very short period of time, if someone should do that, it should be Tony himself and the team. But it's a stable revenue growth. It's 15%. I'm going to run through the numbers, but adjusted for FX, it's 11%, I think. But it's a strong financial, and it's a strength in the company from both a financial and market position.

So all in all, my takeaway from quarter 4 as a newly appointed CEO will be that I have a fairly solid foundation to start from. So having that said, I think it's time that we run through the numbers.

So then if we look at the actual quarter 4 performance, the company makes around SEK 117 million in revenues, which is a good quarter for MSAB and it's representing a growth during the quarter of 10% adjusted for FX 8%. If you look at the gross margin, it's in the higher range of a historic performance and I think that's a very good sign. And I think you can also see that this is the capability of the company if we have a little bit of less hardware focus and focus stronger on our software, it's something that I will come back to.

If you look at the direct EBIT margin, it looks a little bit lower compared to last year. But I think it's important that you look at the adjusted EBITDA margin since I have, of course, as a newly appointed CEO, also been part of doing some certain adjustments. I have introduced some changes in leadership, et cetera, and that has driven some onetime and nonrecurring costs.

So if we look at the underlying margin of quarter 4 and if you compare that with a historic performance, it's a very good EBIT margin of 18%. So overall, in quarter 4 for MSAB, strong performance, and I would say, both in terms of top line and in the adjusted earnings.

If we then go to the full year, the total revenue for MSAB went from SEK 360 million last year to SEK 417 million during 2023. That represents a strong growth of 15% and adjusted for FX 11%. I think this is very good and in line with actually the market and the growth of the market, which depends a little bit on what report you read. But I would say somewhere between the 8% and 12%, so I think MSAB during 2023 have had a solid revenue growth and performance compared to the market.

2023 also provides a higher than last year gross margin, just to the reason that I said if we focus better on pure software rather than mixing it with too much hardware, we see that the capability of the company is to provide rather high gross margins. And same as with quarter 4, if you look at the overall EBIT over the year, 10%, but if you look at the adjusted, where we remove the onetime and the restructuring costs, then we see that the overall EBITDA level of 16%, which is also in the higher range if we compare to historic numbers.

So I think that what I can conclude is that as -- like I said, as a newly appointed CEO, it's a strong full year 2023 from a financial point of view and a P&L perspective. And if we should also have a look at the balance sheet maybe because I think that's also an important part of the financials, especially when we close the year. You can -- I'm not going to talk too much about this, but as you can see, it's a strong balance sheet. We have a cash position of SEK 133 million. The equity is on par with previous year, even though there was dividend.

So the company has, in general, a stable financial platform for future growth. There are no long-term loans or credit facilities, et cetera. So I think that's -- it's a very strong balance sheet for the company.

I think -- with that, maybe we should summarize it, go to the last slide. This might be that I'll repeat myself a little bit, but just to put it in context from a financial point of view.

So like I said, with the growth in quarter 4 and especially for the whole year, if the market is growing somewhere between 8% and 12%, I think, finally, MSAB have sustained or maybe even gained a little bit of market share. So I think in that way, it's a strong performance. You can see that there is quite an amount of restructuring costs. They totaled SEK 27 million. But if you -- if you look at the underlying margin there, operating margin of 16% and the total operating profit of SEK 68 million. It's a strong performance from that perspective.

Another factor that I alluded to through the financial numbers is that during -- going forward, I will try to have an even stronger and more clear focus on the software. We have certain parts of our offerings where we do include and where customers want us to include hardware deliveries. But I think if we try to limit that only to the requested amount or to the request from the customer and we put a stronger focus on our software, we can potentially -- continuously try to strive for placing ourselves in the higher range of the gross margin performance.

Another positive thing, where I think we are rather conservative since we are doing a lot of software is that we don't accrue any of these things. We take the expenses for our development and for our products when we have them, which is also a strong factor in combination with -- the company has no existing loans and this contributes to the strong balance sheet.

And there was a strong cash position with SEK 133 million in total cash and also with some added cash flow during the year. So I think to summarize, a very strong financial position and a great starting point for me as a fairly new CEO.

So with that, I take a lot of positive out of the financial performance. And now I'm going to try to tell you a little bit of -- I have been here now for my 90 or first 100 days. I start to summarize what I have seen. And I'm going to try to put a little bit of my perspectives to you as shareholders on what -- how far I am and what I will focus on going forward.

And with this question, you can understand I wouldn't put this question there if I didn't -- if I haven't identified that there is some more potential in the company. So -- no, we haven't reached our full potential. I would even say, and I think I alluded to that already during the quarter 3 call that there is some untapped potential. However, we need as a company -- in my view, I think there is a little bit of need of some professionalization to run the business on a global level. There is some modernization required. And I will soon talk to you about what I mean with a big part of the modernization because it has to do with the dynamics of the industry and our customers primarily.

And then there is a globalization need. What I mean with that is we need to start to run the company in a more one global company approach -- that might tell you that we haven't really done that. That might be one of the truths, but I think that can create a much better perception among customers. We can run a more efficient operation globally. So there are some of these things. They might look at the internal potential and improvements that I see as a newly appointed CEO.

But that doesn't really matter because I think the most important is the market dynamics, so I have during my first 3.5 months here, I have traveled quite a bit. I have met several customers together with our sales part, the sales staff. And I do that to make sure that me as the CEO, really is close to understanding our customers, the industry, the dynamics and what our customers are facing, but also how they look upon us as MSAB versus our competitors.

So with that, I'm going to try to show you what -- if I summarize the insights that these customer visits in different markets and in different customer segments, what that has provided me. There are a few things that provides these insights. If I summarize them, what our customers are facing and I see on the horizon, and I think you can all understand this is -- in general, I would say, an increased complexity when it comes to digital forensics. And why is that, and I think we can all understand if you compare 10 years ago, how many mobile phones were involved in, for example, a criminal case. And the ever increasing amounts of phones or digital assets that arrives at our customers to -- compared to what arrives there today. It's an increasing amount of data. It's also an increasing amount of data that we are helping our customers to pull out of these phones to provide solutions.

This tells our customers that they need to start to think about cloud adaptations. But when you're dealing with the kind of information and digital assets that our customers are dealing with, there is also a vast volume of data, but there are also security aspects, there are legal aspects, et cetera. And all this creates a more dynamic, but also some challenges for our customers, in general, a higher complexity in the forensic space.

So I think all in all, I think we could be better now, and we better make sure that we start to understand how these complexities are increasing for our customers and if we do that well, that's what I mean that there are untapped potential and interesting dynamics for us as MSAB.

Another good insight that I have been provided after many of these customer visits is that we, as MSAB, we have a very good customer perspective. They see MSAB as a trusted partner and supplier and they appreciate our presence and our high level of customer support. I think this has to do with that we are a Scandinavian European provider and our main competitors, one is from Israel and the other one is from a combination of a Canadian and a U.S. company.

So I think having this background as a trusted partner is also something very strong that we can take great steps forward with. So if you combine what I said about the -- more internal-focused potentials that we can improve with these customer insights, I think that, in general, provides very good dynamics and opportunities for us going forward.

So with these insights, especially from the market and the customers, what will we prioritize going forward? And I just try here to summarize it a little bit. And I just want to convey and if I allude a little to what I said during quarter 3, I think the most important is actually our products. If we want to be a product company delivering on a global level, we need to at least strive to build world-leading products close to our customers. And this is a challenging task.

But I think that needs to be a main focus from me as a CEO running a product company all the way through the organization. We can have -- if we don't have -- we can have a half-baked product with the world's best sales force, and that's going to be very tough. If we have the world's best product and a half-baked sales force, I believe it's going to sell itself a little bit -- by itself.

So to have a strong focus on product, I do see a little bit of modernization required, but also more importantly, the dynamics I just have heard from our -- meeting all our customers, I think this is where we have the opportunities, et cetera, and why it can be interesting to develop with our customers and that we can do that in a great way.

I do also see already that there might be some new targeted technology investments possible. And this all needs to be combined in driving a world leading product suite. So that's going to be a strong focus from my side going forward.

And this, like I said, in combination with a high-performing sales organization. So if you have a good product, and you invest a lot in your customers and in your sales organization, I see that as a good and solid combination. We have already taken during this 3 months period, and we have started from first of January to take the first steps and establish a new structure in a global sales organization over 1 global head of sales.

These are some of the changes that we have already implemented. And we are on our way to implement and continue to make some improvements here. And it looks to me, very promising.

We might also need -- based on these dynamics in the market, we might need to add some competencies that we might not traditionally have had in the company. And that whether it's in our development department or in our sales organization. But I think these are going to be important things to consider here going forward.

And like I said, and all this under one company, a global company approach because I believe that can also make sure the customers perceive MSAB as this trusted partner wherever they meet MSAB and I think that can also make sure that we run a global operation in an efficient way.

So if we should conclude. What I've tried to do here is to summarize it from some different perspectives. So one, I perceive it like I have a very good financial foundation to start from as a new CEO. So I think the company has done a great job during 2023 from a financial point of view. There is a little bit of modernization, professionalization and globalization, a one company approach that I'm already -- have put in plans and that we are starting to implement. But that's fair enough.

I think there is another outside perspective that makes this interesting and why I think it's exciting to be here as a new CEO, it's not always in all companies that you have these trustworthy and financially reliable customers that we have. We are dealing with many government-related agencies, et cetera. And I think it's a very solid kind of customer base. And to be able to do that with that customer base in a fairly niche software security industry with relatively few competitors, that's a good spot to be in.

And I also believe that they are quite -- looking into and starting to understand more and more how advanced technologies we and our competitors are building for our customers, there's quite a high entry of barrier for potential new entrants. So I think in general, I find it a very interesting market dynamics from those perspectives. And if we add that with what I have now learned and during this initial period from our customers with [ different ] complexity, I think this opened up for a very dynamic and evolving industry with a lot of opportunities that we should do everything we can to capitalize on.

So with that, I think that we are more or less done with the presentation, and I think we might have a few questions.

[Kim Sjolund, executive]

So let's -- yes, let's start with the first question. You mentioned restructuring for 2023. Is it likely that we will see further restructuring costs in 2024?

[Peter Heuman, executive]

That's a good question. And taking a step back here, I think that most of you would realize that when there is a new CEO, it's not uncommon that there is a little bit of changes happening, et cetera. I have been running a 90-, 100-day program here where I have my Board involved.

I have started, as some of you might have seen with some management changes, it alludes to what I explained to you, a little bit of modernization, et cetera. Yes, I can say like this, I've tried to do everything I can and identify during quarter 4, will there be some further changes or potential restructuring during 2024. Yes, I think it's likely, but I'm not going to speculate anything on or guide on what that could be. I think I should try to be sort of balanced on that.

[Kim Sjolund, executive]

Yes. Okay. So we have another question here in the chat, regarding nonrecurring costs, to what extent did they affect the cash flow in Q4? And also, what kind of effect on costs and stuff will these have going forward?

[Peter Heuman, executive]

If I go -- now I should have had Tony here. I'm pretty sure that in total for the year, it was SEK 27 million in restructuring. And if I'm not wrong, I think it was almost SEK 20 million during quarter 4. So it should have affected it with around SEK 20 million. And I think you saw in the numbers that during quarter 4, we had an EBITDA of -- an adjusted EBITDA of 18%. And if you look after restructuring, if that answers the question.

[Kim Sjolund, executive]

Yes. And then we have another question and let's take this one on market growth, of the market growth range of 8% to 12% that you mentioned, where do you see MSAB being able to perform with the new adjusted organization?

[Peter Heuman, executive]

Very good question, but I will be after this short time in the company a little bit careful with guiding exactly. But let me say like this. I think it's been fairly clear that an important task for me since the company has historically not really managed to gain or keep its market share, I have that as one of my most important priorities. That's why I'm also happy to see that the company has done that during 2023.

And with the improvements and changes that we are implementing right now and also together with some of the product launches that has happened during 2023, even before I started, I have good hopes that we should be able to do that. If not, I can promise that that's on top of my priority to make sure that we are keeping a good growth rate that where we rather start to gain back some market share, that's the highest priority -- one of the highest priorities for me. But I don't want to guide exactly in any potential outcome of it.

[Kim Sjolund, executive]

Getting quite a lot of questions here. So we have one regarding customer segments which is, do you have any plans to also turn to municipal, regional or even private larger companies as customers?

[Peter Heuman, executive]

Yes. Very good question again. I will be a little bit careful, but let me phrase it like this. I think -- I hope it came across that there are a very interested industry dynamics among our current customers and the different customer segments. Some of our competitors are also selling more to, for example, private sector. I think this is something that has been part of my analysis that I'm now bringing forward into the company. I'm not going to reveal exactly where we are on that, et cetera. There might be a potential that we can actually use some of the product assets we have also to new segments. But let's see where we put that on our priorities. So I have to come back on that.

[Kim Sjolund, executive]

Okay. Thank you. And then we have a question in relation to the product portfolio then. You mentioned modernization of your software stack, would you like to comment on how much legacy you have today as you see it?

[Peter Heuman, executive]

Okay. Fair enough. And as a new CEO, it's easy to step into product companies and you might identify that there is a little bit of legacy. I have been working in many different companies. Most companies have a little bit of legacy. So I find it rather normal. Yes, there is a little bit of legacy, maybe in bits and pieces and parts of our stack, for example, here, but I think that's very normal.

I think the modernization I talk about is actually to prepare ourselves and be very close to the customer and understand the dynamics, so we really can take the step -- the technology steps forward in close dialogue with our customers, and see how that -- how we can modernize to help them solve their complexities.

[Kim Sjolund, executive]

Okay. Thank you. Let's take another question here, which is, could you say a few more words about OpEx growth in 2024, especially in relation to sales growth for 2024?

[Peter Heuman, executive]

Yes, but OpEx growth. Like I said, I have -- there are 2 areas that I mainly focus on. If we should be a global product leader, we need to make sure we invest and put -- kind of reallocate more resources and dollars into the product development research organization. So that's one important category.

The other one is the sales-related category. The sales-related category is easier to grow. I'm not focused on growing OpEx. I'm going to be focused on growing revenues, but there you can steadily start to grow with your revenue. In product, you might need to dare to invest in OpEx to build or increase throughput or increase time to market. which has a higher risk. But as a product company, you have to align those 2.

The sales part is much easier because the more you sell, it's easier to add, et cetera. So I'm not too focused on providing for shareholders any large changes in OpEx on this. I think we can scale this up in -- especially from the sales side, that's not a big problem. The important part is to secure where do we invest and how can product focus change OpEx in one or the other direction.

[Kim Sjolund, executive]

Okay. And then we actually have a couple of our participants who wonder that you have a lot of cash in the company. What do you intend to do with that?

[Peter Heuman, executive]

Yes. I should be careful saying too much about that. It's not -- this is also a Board or and owner kind of question. So like I stated, I think we have a solid financial position. We have a strong cash, we have a strong balance sheet, and this should provide us with some flexibility and alternatives. It's not the pure CEO decision. This is something that I discussed with the Board and the Board with the owners.

[Kim Sjolund, executive]

Would you comment your competitors a little bit more?

[Peter Heuman, executive]

Okay. Yes, I can do that. I haven't been in the industry for that long. My normal take is that I try to talk very well about the competition. You should have respect for them. I have the utmost respect for the 2 main competitors that we meet in this, like I said, fairly niched security segment. There is 1 company with -- which is public traded in U.S. They are called Cellebrite. It's an Israeli company. Having worked globally quite a bit myself. I have the utmost respect for Israeli companies. They are doing a fantastic job. They are very tech savvy. They are quite aggressive in their way of selling, et cetera, and they are doing a good job. So they are one of our main competitors.

And the other main competitor, I would say, today is the recently merged companies Grayshift and Magnet, now called Magnet owned by Thoma Bravo. Also a good company, larger than MSAB comes from kind of the same background all 3 -- we all 3 do.

So I think those are the 2 main competitors and something that we should have respect for. But like I said, I have realized meeting customers. We have a strong -- they have a strong trust in MSAB, they like our presence, our good customer support.

I think they kind of -- we -- we are a good European alternative with some Scandinavia flavor, which we are honest, what we can do, what we can't do. And I think I think we are positioning us quite well there between the Israeli and the Americans, and we have some strong assets that is going to be complicated for them to copy.

[Kim Sjolund, executive]

Thank you. So then we have a question associated more with the regulatory part. How does the cooperation with ISP work? Is this something that has changed for the better or the worse, could you comment?

[Peter Heuman, executive]

Difficult for me to comment. Yes, we have an oversight for part of our portfolio from the ISP in Sweden. I have met them. I don't have all the history. I have put myself together with part of management, et cetera, and to looking into this further, I should be very careful in having any strong opinions of that right now. It's been part of my 90-day program, and there's something that we are looking into further how that could potentially help us or if there's something more we can do. So I will be a little bit careful in saying too much at this early stage of me starting here in MSAB about that.

Is there any more questions, Kim?

[Kim Sjolund, executive]

I think, basically -- perhaps we could take 1 more question and it's in relation to the types of customers we're serving. Could you say a little bit about how the MSAB products can be used in the military industry?

[Peter Heuman, executive]

So we have part of our standard product or the most common product that we are selling the most revenue-generating product where you basically can extract information out of a telephone. There is also part of military segment that is interesting in that kind of product, they are using that kind of product. I would say that's the most normal product to use in that segment.

So, of course, it differs a little bit when you look from an outside perspective -- from a law enforcement versus military and in the background, it's actually a request for kind of the same product, but they are used in a little bit different way. So yes, I think that's the answer.

[Kim Sjolund, executive]

so I think, we're done.

[Peter Heuman, executive]

Yes. Okay. So I hope we have answered most of the questions. If anyone have more questions that we have not managed to answer, feel free to contact me or Kim and we're going to make sure that we get in contact with you.

So thank you, everyone, for participating. And like I said, it's -- according to me, a strong financial foundation for me to start from. So thank you also to the whole MSAB team who did a good performance over 2023. All right. With that, thank you, everyone, for attending.