Frequentis AG

XETRA:FQT

Earnings Call Analysis

Earnings Call Transcript 2023-Q4

[Operator]

Ladies and gentlemen, welcome to the Frequentis Full Year 2023 Results Conference Call. I am George, the Chorus Call operator. [Operator Instructions] and the conference is being recorded. [Operator Instructions] At this time, it's my pleasure to hand over to Stefan Marin. Please go ahead.

[Stefan Marin, executive]

Ladies and gentlemen, a warm welcome from our headquarters in Vienna. With me are Norbert Haslacher, CEO; Monika Haselbacher, Chief Operating Officer; Hermann Mattanovich, Chief Technology Officer; and Peter Skerlan, CFO. Let's start with Norbert Haslacher presentation on 2023.

[Norbert Haslacher, executive]

Yes. Good morning. Welcome from me too, before I start with the figures I want to share, a big thank you to all Frequentis employees around the globe who handles the past year in such a positive manner. I think we, as a team, can be very proud and satisfied with our results we have achieved 2023. Before going into the details of the past year, I would like to reflect on our now almost 5 years as a listed company. I think the listing gave us the opportunity to become more professional. It increased our visibility for stakeholders like analysts, investors, the media, the general public and also authorities.

The questions we get help us to improve. We managed 2 pandemic years followed by 2 years of high inflation, especially in Austria. But despite that, we grew significantly in the past 5 years. Revenues increased by 50%, EBIT increased by 70%. Order intake increased by 65%, employees increased by 26%.

I would like now to start our presentation with Slide #2. As forecasted a year ago, we increased order intake and revenues again. Order intake rose by a very impressive 25% or exactly EUR 100 million more than the year before, giving us EUR 0.5 billion order intake. Orders on hand are close to EUR 600 million now. That's up 14%. The revenues grew for the third time in a row by more than 10% to EUR 427.5 million, above the EUR 400 million level for the first time.

EBITDA was a little bit lower at EUR 44.7 million. The EBITDA margin was 10.3% which is higher than the pre-pandemic average 2015 to 2019 of 8%. Compared to 2022, we made absolute progress with our EBIT profitability. EBIT was 6.6% higher at EUR 26.6 million for 2023. The EBIT margin was 6.2%, the pre-pandemic average was around 5.5%. Net profit was EUR 20 million, the second highest net profit in Frequentis history.

In view of the net result, we are proposing a dividend of EUR 0.24 per share, which is an increase of 9%. Thanks to the healthy balance sheet, the equity ratio was at 41.9% and at the end of December '23, we had a net cash position of EUR 84.3 million, including EUR 53 million from advanced payments from our customers for our projects.

Coming to the order intake now. Slide #3 shows that the demand for our solutions is growing constantly. So incoming orders broke through the EUR 0.5 billion per year in 2023. Order intake was up by almost 1/4 or exactly EUR 100 million more than the year before as a total of EUR 505 million. Book-to-bill ratio was 1.18 compared with 1.05 in 2022. ATM order intake was plus 25%. In other words, EUR 70 million higher than -- higher at EUR 345 million. PST showed an increase of 23% or EUR 30 million more at EUR 159 million.

This leap forward was possible because we followed continuously our strategy. So product development through research and development, R&D, selling solutions rather than products, a high degree of local customer intimacy, which we have built up over the years and an excellent teamwork over the whole value chain.

Looking forward, we have a well-filled opportunity pipeline and order pipeline for 2024. As a growth company, our goal is to increase order intake again in 2024. On Slide 4, it shows contracts and framework agreements that last for more than a decade. So they create the business for future growth.

First, through the revenue stream from a setup and implementation of the projects themselves. Second, through recurring maintenance revenues; and third, through additional orders from change requests. And fourth, because such projects create a reference base for other tenders. Usually, tenders are based on technology or references and price points, and the better -- the bigger the reference base, the higher the reference points.

Before going more into financial details, I would like to hand over now to Peter, our CFO.

[Peter Skerlan, executive]

Thank you, Norbert. A warm welcome from me in Vienna as well. Now to Slide #5. Orders on hand are now close to EUR 600 million. EUR 595 million to be precise, an increase of 14% versus the year-end 2022. That gives us a good visibility into 2024 and beyond. More than EUR 300 million out of the EUR 595 million will generate revenue in 2024. Revenues were up 11%, the third time in a view that revenues showed double-digit growth. 99.5% of the revenues growth in 2023 was organic.

We achieved a compound annual growth rate, CAGR, of 8% in revenues in the past 5 years despite flattish CORONA yields, thanks to the hard work of everybody at Frequentis. Approvals achieved in revenues proves that our motivated employees are as resilient as our business model. The segment's bullet showed an increase at ATM. It accounted for 69% of revenues in 2023 versus 67% in 2022. Public Safety and transport was 31% in 2023 and 33% in 2022. Relative and absolute revenue growth in 2023 were higher in air traffic management with an increase of 13.8% versus 4.8% for public safety and transport.

So Slide #6, the stable business model fosters growth, and there is ample room to grow our business. With our current solutions, we can address a market of EUR 3 billion to EUR 2 billion. The total global market for controlled room solutions, including equipment, is EUR 13.1 billion annual. The slide shows that we are able to grow revenues in all regions. While Europe showed the highest absolute growth, Australia Pacific was the fastest-growing region in relative terms with growth of more than 20%.

On a regional basis, our European home market remained strong and generated 2/3 of revenues, followed by the Americas with 16%; Asia with 11%; and Australia, Pacific and Africa was 7%. I'm now at Slide #7, which is a good [ examination ] of our business model. The pie chart on the left shows that more than 60% of revenues were generated by systems that are already installed for our customers. 36% came from new products and systems for our customers.

The pie chart on the right shows the revenue split by revenue type. It's an appropriate split as customers order and buy complete systems, not individual project services, software or hardware. More than 35% of revenues come from project services like the design of control center architecture, project execution and day-to-day project management. Next comes maintenance, which accounts for 30% and mostly recurring revenues. The pure software part is about 20%, followed by hardware, which accounts for less than 10%. Software is almost exclusively software developed by Frequentis and sold within projects.

However, includes in-house design and manufacturing of selected safety-critical hardware and some third-party IT components. Our aim is to increase the proportion of software but there is no fixed time line for this as it depends on customers' needs and priorities. Let's have a look at Slide #8. The slide shows the constant revenue development for the group in both segments. The group EBIT margin was 6. 2% better than pre-pandemic levels, in other words, compared with 5.7% in 2019 but a little bit lower than the 6.5% margin in 2022 due to inflation.

The graph shows the outperformance of profitability in the public safety and transport segment compared to the bigger ATM segment. Public Safety and Transport shows that it is possible to achieve double-digit EBIT margins. In 2023, public safety and transport absolute EBIT even surpassed the 2021 level when profitability was positively influenced by lower travel costs due to the travel restrictions in the pandemic years.

A few comments on ATM's EBIT margin. We are investing in product development in ATM right now. We put together comprehensive solutions and systems based on the products we have acquired through merger and acquisition. Research and Development is not capitalized. In addition, ATM needs to earn enough to cover the depreciation of product and customer rights following acquisitions. In the public safety and transport segment, our main software product, 3020 LifeX is well developed and a leading edge for controlled rooms.

The business model behind is software-centric and based on licenses, software maintenance and project services like implementation and training. It is important to understand that start-up costs for the major products gained in 2023 in both segments will have an impact on the EBIT margin in 2024.

For more information about our merger and acquisition strategy, I will hand over back to you, Norbert.

[Norbert Haslacher, executive]

Yes. Thanks, Peter. So what we want to share with you on Slide #9 is a little bit of history since our stock listing in May 2019. Since our IPO 2019, Frequentis has made 9 acquisitions. So the proactive search for interesting M&A opportunities is meanwhile core of our strategy. When making acquisitions, we focus on parameters such as expansion of the product portfolio, a profitable business model, but also a cultural fit and the acquisition price.

In '23, the focus was on make or buy decisions for technology acquisitions. In April '23, Frequentis acquired a 77% stake in the German voice over IP company, FRAFOS, We use FRAFOS technology to enhance the cybersecurity of our customers' connections to the IP world. And in June '23, we acquired 100% of GuardREC based in Norway. After the acquisition, we formed a global recorder business that also includes the existing product line and the purpose of this step was to strengthen the competence in the recorder market and data analytics.

We will continue to look at which technologies and products we develop ourselves and which we buy in due to, for example, time to market reasons. Slide 10 shows growth markets where products developed by our company are already in use. So all these markets are being developed step-by-step in a sustainable manner. Digital towers are in place all around the globe, Frequentis is leading the way with innovative solutions that go beyond the original starting point and remote towers to handle air traffic for small airports from remote locations.

Now even large airports like Munich, in Germany, evaluate virtual towers. That is a major milestone for the digitalization of air traffic control. Drone management, where Frequentis supplies flight information systems for air traffic controllers is a growing market with installations already in full operation in Austria, Estonia and Norway. Frequentis is an active player in the use of technologies for networks for air traffic management, police, fire and emergency services as well as public transport.

Our strength is underlined by 2023 order from Verizon for the enterprise network of this federal aviation administration which is responsible for the United States airspace. And the contracts placed in 2024 by the FAA cell for the digitalization of air-to-ground communication. On Slide #11, we would like to regard our employees as the cornerstone of our success. They are the experts who help make the world safer for all of us. We have to focus on increasing the portion of women at all levels through various initiatives and programs. The group now has 23% female employees, and the percentage is a little bit higher in Austria with 25%. Romania -- Romania's 33% reflects a higher proportion of women graduating in technological disciplines in Romania. The average age in our group is 43, all generations are united in the Frequentis team.

The youngest employee is 18 years old and the oldest is 79 years old. So many stay with us for a very long time. Long-term commitment is a core value for us, which is reflected in the loyalty of our employees and our customer relationships. On average, our systems run for 10 to 15 years. Some for even as long as 20 years. Thanks to our good reputation. We get more than 4,500 applications a year. However, it remains a real challenge to find technical skills like network, IT and software development.

With revenue growth of 8% in recent years, we have expanded faster than the market average, which was 4% to 5%. The operation of national safety critical infrastructure is largely independent of macroeconomic trends. This is the basis of the Frequentis business model. The drivers that grow our business are fully intact. Security, which is a prerequisite for the development of societies and economies, mobility of people and goods and technology is needed to make processes more efficient.

Let me conclude with the outlook and our agenda for 2024 on Slide #13. Based on orders on hand, worth almost EUR 600 million we are working at a very good capacity utilization level. More than half of the orders on hand will generate revenues in 2024. We aim to further increase revenues and order intake. The sales pipeline is well filled also for 2024 and beyond. Capital expenditure will be about EUR 12 million.

A very important part of our success is our professional R&D. Companies funded that its self-financed R&D expenses were EUR 25 million in 2023. We expect R&D to be higher in 2024. As you can see in the balance sheet, almost no R&D expenditures were capitalized. R&D expenditures have been recognized in the income statement. Regarding profitability, the inflation and the start-up costs for major projects acquired in '23 will impact the margin situation in 2024 as usual. Therefore, we expect an EBIT margin of about 6% in 2024.

Finally, I would like to highlight that we are looking forward to another year of growth in the Frequentis growth. And we are now ready for your questions.

[Operator]

[Operator Instructions] Our first question comes from Miro Zuzak with JMS.

[Miro Zuzak, analyst]

Yes, hello, ladies and gentlemen, can you hear me.

[Norbert Haslacher, executive]

Yes, Miro, we can hear you.

[Miro Zuzak, analyst]

Okay. I have basically one a bit bigger one. If I look at the development of the group, we see extremely strong order intake growth. We don't see strong sales growth, and we don't see any increase in the EBIT margin. And you also do not guide for an increase in the EBIT margin in 2024. I also don't see a sales guidance for 2024. Can you at least give us a bit of an idea that basically the top line is going to grow probably not as much as the order intake did in 2023. But can you give us any idea what you expect from the top line in 2024?

[Peter Skerlan, executive]

Okay. I start with one of your comments here, It's Peter. Peter Skerlan. I would like to start with the EBIT margin. As we try to highlight in our presentation, the EBIT margin is especially a little bit weaker in ATM. Even we have a market share of 30% but increased IT expenses are currently necessary to turn individual projects into end-to-end solutions. And as in the past, we didn't capitalize R&D expenses, the individual products, the products we have gained through acquisitions. So what we would like to do now is to transform from our hardware-centric to software-centric in the ATM segment, where we are still underway, but not as far and as advanced as in the public safety business domain from the public safety and transport segment. The present -- not all ATM customers issued tenders for software-centric solutions. So we still see not enough software sales, but we want to improve here. Concerning your other questions for 2024, Norbert pointed out that we want to increase order intake and revenues, but see the EBIT around 6% for 2024.

[Miro Zuzak, analyst]

Okay. Just a follow-up. I think you don't -- you didn't answer my question. So my question was about an idea of the top line that you expect in 2024, for the growth of the top line. Is it more 2022 or more like 2023?

[Norbert Haslacher, executive]

There is a consensus from the coverage banks. So that's BankM, [indiscernible] and RBI. The consensus lays around EUR 445 million for the top line for 2024. And as usual, I think we feel very comfortable with that top line development, which is the consensus of these 3 banks. You can imagine with 0.5 billion orders, of course, the revenue line will also develop accordingly in a good way. On the EBIT line, I just want to mention, Austria still has an inflation rate of 8% now, the second in a row, 2022 and '23.

This is still challenging for the bottom line, but I think we have managed very well an 8% salary increase by the labors councils negotiation as we have in Austria. I think the EBIT impact, we have managed very well in '23, and we will also manage that very well in '24. What's very important for us to understand is our business model. So when we acquire a EUR 100 million deal, which is delivered over the next 10 years, you always have costs in the first year and then go into the rollout the years after for 3 to 5 years. And we have -- as you have seen, we have won the U.S. Federal Aviation Administration, we have won the French Railways, and we have on Norwegian emergency call-taking, those are very large programs, and '23 and '24, the initial investments for such big programs, which then will go and rollout '25 and beyond, will have an impact on the EBIT margin again.

And I think this is pretty normal for our business model when it comes to the EBIT line.

[Miro Zuzak, analyst]

Okay. So you basically say consensus is what we should expect, the EUR 445 million which would be, let's say, growth a bit more than 6% or so. That's your answer.

[Norbert Haslacher, executive]

Yes. Miro?

[Miro Zuzak, analyst]

Yes. And maybe one last question. Last year, so in the presentation, you say that more than EUR 300 million of EUR 600 million order backlog should realize in 2024. What was the number last year? Did you also published in such an overlap?

[Peter Skerlan, executive]

I think it was EUR 270 million but we will look it up. I think it was EUR 270 million.

[Operator]

Our next question comes from Teresa Schinwald with Raiffeisen.

[Teresa Schinwald, analyst]

First, on the R&D expenses, they fell to 5.9% of revenues in 2023, but they were at 6.9% in 2022. Is this 6.9%, 7% a realistic number to expect for 2024, as you mentioned, the increase in R&D costs and to get a feeling for the number?

[Peter Skerlan, executive]

Here's Peter. Thanks for the question. So your question was, I hope I got it right. Your question was in 2022, the R&D expenses were 6.9%; in 2023, 5.9%. So if we have now a higher amount, can we expect something like 2023 or something like 2022? Is that the question?

[Teresa Schinwald, analyst]

Yes. And I guess -- or it was rather is this around 70% level. Would this be a fair assumption?

[Peter Skerlan, executive]

We hope that it will be between 2022, 2023. We hope that we will not achieve again something with almost 7%. But it will increase due to inflation and cost increases, but it should not be in relation to the sales.

[Teresa Schinwald, analyst]

Okay. Then my next one is, can you give us an idea how much of the new long-term contracts like France and Norway and the FAA contributed to the order intake in 2023? I remember you mentioning a single-digit amount, for example, for the FAA order in the first half earnings call. But just can you give us a feeling how much of it was already booked in the 2023 order intake?

[Norbert Haslacher, executive]

Yes. For the large FAA program, as you know, we have a principle we only book the definite orders we get from the customer out of the program. So the programs are usually very large, so 3-digit million, but then the orders we get are piece by piece. So I think for the FAA order, we have only booked EUR 13 million, if I'm not mistaken, yes, Peter says yes. So it's EUR 13 million. We have booked as part of the EUR 0.5 billion. And I think the large railway program in France was similar size. Also only EUR 12 million to EUR 13 million and Norway, I think, was around EUR 20 million. So very, very small share of the EUR 500 million.

[Teresa Schinwald, analyst]

The EUR 500 million are they for each order? Or are these the orders combined? No, sorry, the order intake. Sorry, sorry, I got it wrong. And my last question is on a potential time line for large airports evaluating this remote power. So as Munich is now looking at it, what's the time line and the process we can expect from this evaluation and also the potential positive outcome if Munich decides to go forward with remote tower?

[Norbert Haslacher, executive]

Yes. That's the question I would also love to get answered, especially by the traffic controllers in Munich. But I think I cannot answer that, Teresa, unfortunately. But what I think it's a big step that Munich as contracted Frequentis with a validation system for the Munich Power, which is a high-capacity tower in Europe to validate it and to learn concept of operations for air traffic control in the large high-capacity tower. I think the next 16 to 18 months will show how satisfied the controllers are and I can hopefully report or we can hopefully report in our next annual conference, how satisfied the controllers are with our technology in Munich.

[Peter Skerlan, executive]

Before we take the next question, probably I can correct my answer concerning how much of the orders on hand we plan to realize 1 year ago. I mentioned EUR 272 million, and the number was EUR 4 million higher. So it was EUR 276 million. to give you the right figure.

[Operator]

Our next question comes from Gautier Le Bihan with ODDO.

[Gautier Le Bihan, analyst]

My question is about the EBIT margin. So I understand that for 2024, the EBIT will be about 6%. But do you expect growth from the EBIT margin in 2025, 2026 or if you have new contracts, the EBIT will stay close to 6%?

[Norbert Haslacher, executive]

Yes, Gautier. Thank you for the question. I think looking into the future, we always said that Frequentis is in the middle of the change of change in our portfolio from hardware-centric to software-center solutions. And this is not a fast endeavor. That's a continuous endeavor. At the moment, as reported last year, we spent a lot of R&D money for replacing our world market-leading air traffic control communication system released 8 into a softer based release 10. That's a double-digit investment per year we have to undertake. That will -- we won good contracts to support that investment from NavCanada from Austria and also from Norway.

So the solution itself is in the trial mode in those countries. That will continue. But I think over time, we have a very good chance to increase our EBIT margin. I think we have shown that from our history till 2019, we have been around 5.4%, 5.7%. Then we had CORONA where we had no travels. We had nearly 9% because nobody was allowed to fly. So we produced no travel costs. After that so the comparison should be prepandemic and past pandemic. We increased from 5.7% EBIT to now 6.2% and 6.4%. And I think the way it's paid for further EBIT improvement in future.

Nevertheless, we have to invest into our solutions to make them adequate to the market expectations and to follow our software strategy. And from the beginning, we said it's around 5 to 8 years' endeavor when we have to change our portfolio continuously. Now we are around a 70% software share of our solutions already.

[Gautier Le Bihan, analyst]

So you don't have any clear time line on the growth of the EBIT in the next years.

[Norbert Haslacher, executive]

Yes.

[Operator]

Our next question comes from Becker Roger with BankM.

[Roger Becker, analyst]

Yes, do you hear me?

[Norbert Haslacher, executive]

Yes, we can hear you.

[Roger Becker, analyst]

Questions have been almost been answered. But 2 short questions left on my paper here. The first is regarding the orders on hand. And my question here is whether there is a possible issue with the bulk risk? Maybe you can comment on this item a little bit. And my second question extends the question from my colleague regarding the R&D, which is guided to be a bit higher next this -- the current fiscal year than compared with last fiscal year. Do you have a set of focus on where to invest the R&D expenses? So these are my 2 questions.

[Peter Skerlan, executive]

Okay. I would like to answer Mr. Becker. I would like to answer your first question concerning orders in hand, and the possible issue with bulk risk. As you can see the orders on hand at distributed fairly among ATM and public safety and transport to 13 ATM and 13 public safety and transport. And due to the fact that Norbert mentioned larger orders to only the first order are included in the orders on hand and not the total stream between the big scale [indiscernible] but I will take -- again, 2/3 of it is in Europe. So I think that makes it easier for us in our own markets to execute orders and concerning the second question, I would like to hand over to our CTO, Hermann Mattanovich.

[Hermann Mattanovich, executive]

Yes. Hello. We have invested in the past more in PST. You know that we are on our way from hardware-centric products to software-centric products. The PST market segment is faster in this respect than the ATM market. ATM market is very conservative in many respects. And now postpandemic, we see stronger growth in the ATM market, and we invest now mainly in the transition from hardware to software in the ATM market. And at the same time, we have acquired new products with M&A. And we combine, as Peter explained already, those new products into solutions, into the ATM market, which again is R&D investment in ATM.

This explains as well why you see that the profitability in ATM compared to PST where it's going in ATM, it's flat or even going down. This is because we do not capitalize this development and we paid out of our sales. And this clearly explains the picture that you have seen in the presentation. It's the same for 2024, where we even plan to invest a bit more than we did in 2023.

[Operator]

Our next question comes from Stefan Winterling with Isar Holding.

[Stefan Winterling, analyst]

Can you hear me?

[Norbert Haslacher, executive]

Yes, we can hear you.

[Stefan Winterling, analyst]

Two questions. As you're moving to a more software-centric business model in ATM, do you still sell licenses, one-off licenses? Or do you also generate Software-as-a-Service rental recurring revenues? Does that -- has that reached a critical size? And can you please comment on the corona effect in ATM? Your customers, the airports, they still had to invest during corona, but they didn't earn much. So they've probably been more price sensitive.

Now I presume they are earning pretty well. So has price sensitivity of your customers in ATM changed? In other words, is there a prospect for slightly higher, better margins even for new contracts in ATM? And ATM has really taken off in the last 1 or 2 years. Looking back, I would say, even during corona, so could you also, in that respect, comment on the corona effect in ATM, please?

[Norbert Haslacher, executive]

Yes. So first question, license business. I think when you compare public safety and transport versus the ATM segment, we can show that initial R&D investment in replacing hardware with software on the example LifeX show that we can achieve continuously double-digit margin -- EBIT margin with our software-centric business model in PST. The same will apply for ATM, but it will take time to change our product lines. When it comes to is it license or is it Software-as-a-Service, PST segment, which is usually a more bright segment than ATM, does not show at the moment, significant Software-as-a-Service requirements. They are still on-premise solutions, buying licenses and paying softer maintenance.

We have contracted the first Software as a Service contract in the United Kingdom with West Yorkshire Fire, that was the first customer. We see some movement in the U.K. going to a Software-as-a-Service model, especially for smaller customers, who cannot afford an on-premise solution. But at the moment, I would say, 95% of our software-centric business model is license-based and only 5% is Software-as-a-Service based. But that can change over time if they see that a Software-as-a-Service model is also working well for them, moving CapEx to OpEx. So that's one thing.

In ATM, we don't see any Software as a Service at all because they are usually in their budgeting, buying hardware buying, systems, buying licenses and then pay maintenance for it. When it comes to corona, I mean, to be honest, I've rarely seen an air navigation service provider thinking in commercial, so most of them are still governmental entities. They want to spend their money. They get a budget for the year. So price sensitivity, I think, is not driven by the ANSP. It's more driven by the competition who want to enter the market or enter a specific customer.

And when you see our business model, it's all public tender based. So we -- if we want to win the customer, we even go below our margin expectations initially, and win a contract with very low margin because we know that over the time, 10, 15 years, we will get the money back 3, 4 times over change requests, maintenance efforts and so on. That's our business model. And that's why I explained, especially for large contracts like the federal aviation in the United States or also the SNCF in France, there, you have the win to contract initially and you make your money then the next 15, 20 years. So that's the model. Is it more price sensitive or less price sensitive than during corona, I don't see any difference at the moment. It very much depends on how they structure the evaluation criteria to award the tender.

I think that's the brain where you can win or lose a program, helping the customer to shape the winning points for price points reference points and technical solution. And I think we have shown with 0.5 billion orders last year that we have done that pretty much well in '23. Does that answer your question, Stefan?

[Stefan Winterling, analyst]

Yes. Thanks. Perfect.

[Operator]

Our next question comes from Werner Friedmann with A&I.

[Unknown Analyst]

It's only a short question on the minority share of the results that went up substantially in the last year to 1.5 million in August was clearly below 1 million. The question is, is this coming from the acquisition profits you made? Is this a very profitable company? Or is there a one-off part in that increase?

[Peter Skerlan, executive]

Here, it's -- thank you for the question. It's a mixture where the subsidiaries with minority shares achieved quite good results in 2023. We managed especially for 2 companies to improve the EBIT margin. And that means that also the minority shares have more value.

[Unknown Analyst]

So no one-off component and one should think that this positive development is going to continue?

[Peter Skerlan, executive]

Sorry, I have not -- it's not a one-off...

Of course, we hope that the improvement is a long-term improvement and not only a short-term one.

[Operator]

[Operator Instructions] We have a follow-up question from the line of Miro Zuzak with JMS.

[Miro Zuzak, analyst]

Yes. First of all, thank you for clarifying the number I've seen it in the presentation of last year as well that EUR 276 million. I have just a very small one. In the presentation on Page 16, you mentioned a EUR 3.5 million change in project provisions. And If I get it correctly, you took the provision charge in the books. So in the other operating expenses. Can you tell me what project, this was related to? And what the reason was to take this provision?

[Peter Skerlan, executive]

Thank you for the question. We are forced to do a provision if the future revenues don't cover the future cost of a project. There are 2 reasons possible for that. One is that the margin, the [indiscernible] was sold is available, one. And the second one is that we already had the possibility to build everything and to realize all the revenues, but the residual cost to, let's say, eliminate some areas or to final -- finalization steps for the project. In this case, it's a bulk of projects behind this provision...

It's small amount.

[Miro Zuzak, analyst]

Like 5 different projects that you have to take a provision -- but there's no...

[Norbert Haslacher, executive]

Miro, can you speak a little bit louder because we hardly understand you.

[Miro Zuzak, analyst]

Okay. So it's more like a couple of projects. It's not one single one. So it should be considered a recurring charge. You're going to have this next year again?

[Peter Skerlan, executive]

Yes. Yes. Yes, you will always see that. The question is, are we able to finalize a lot of projects, but where there are several residual costs or 10,000 a year, 50,000 a year to finish it, but we have already got all the way around. or the other things when there is sharp competition and where to minimize price then that probably also then to the point where we have to make a provision but in this case, it's a mixture of both and the longer list. In the last year, I think we finished 200 projects.

[Operator]

Another follow-up question from Stefan Winterling with Isar Holdings.

[Stefan Winterling, analyst]

M&A, could you comment on your M&A pipeline and potential M&A targets? Are you focused? Is a software one focus area for you in light of the transition. So would you make acquisitions rather for technology or to acquire customers, geographies, you're thinking about targets? And if you could comment on the landscape of larger corporates. Historically, you've also made acquisitions of noncore asset spinouts of larger groups. Is there still a regrouping in these big corporates? Or how is the current situation with regards to that pipeline?

[Norbert Haslacher, executive]

Yes. So answering the first question, my statement from the IPO is still valid that we have currently around 500 governmental customers around the world in 150 countries in the world. So what we are not interested is to acquire companies with additional market segments or with additional customer segments because I think we have pretty much good coverage with our local subsidiaries and sales organizations in creating enough intimacy to our existing customer baseline, which is a very broad one around the globe.

So what we are focusing on is to extend our product portfolio step by step, but in a sustainable way and not too fast because we do not want to overstress the organization and the product lines have to be software and to follow our software story and to build together with our existing products solutions together with the new products to create operational value for our customers and have a better place in the upcoming tenders.

This year, so 2023, we also implemented evaluation process internally to get away from the not-invented-here syndrome, meaning that is it really necessary to develop everything ourselves? Or does it make sense to buy a technology which is shortening our time to market and also limiting the risk of having a self-developed software. That's why we have acquired GuardREC and FRAFOS as a technology piece to be able to have a shorter time to market in the area of cybersecurity and the area of data analytics.

Coming to your second question, we analyze between 25 and 30 companies a year. To be honest, most of them do not fit our strategy. They are hardware-driven, they are old technology or more cultural fit to our family culture we have in Frequentis. That's why we keep our fingers away from them. Of course, there are opportunities out there. We are not in a major due diligence process at the moment. But there are companies which are still of interest for us. Are they part of corporates? Currently not. But what we see in our competition environment is that especially defense companies, they, of course, try to reassess their portfolio because they all focus on hardcore defense products. That has been the case, as you have mentioned, with L3Harris already 3 years ago. We also see that other large defense companies reassess their portfolio and maybe get rid of softer pieces which are not part of their core defense strategy because they are more in the civil environment like air traffic control or public safety.

So both questions I can answer with, yes, M&A is still on our agenda, a little bit slower maybe to give enough time to get organized with the acquisitions we have done so far. And yes, there are still corporates reassessing their assessment, especially large defense companies who have civil products as well as they have a clear focus on defense because the margins and the market growth is significantly in the hardware defense core business of them. Does that answer your question?

[Stefan Winterling, analyst]

Yes. Very helpful. Thank you.

[Operator]

Ladies and gentlemen, this was our last question. Back over to Stefan Marin for any closing remarks.

[Stefan Marin, executive]

We are looking forward to the meeting at the Zürs conference hosted by Raiffeisen Bank International, the Hauck & Aufhäuser, Stockpicker Summit and the Berenberg Discovery Conference later on in the second quarter of 2024. We will report our half year results on the 14th of August 2024. And in the meantime, you can always drop me a line at [e-mail] to arrange for a call. Goodbye, and take care.

[Operator]

Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.