Clavister Holding AB (publ.) (CLAV) Earnings Call Transcript

Good morning, everyone. Welcome to our Q2 '25 interim report presentation. My name is Kate Linwood, and I am your host for today's session. And with me, as always, is our CEO, John Vestberg; and our CFO, David Nordstrom. So yes, welcome today. We will start by John giving a short business insight from the last quarter, followed by David elaborating on the financial details. And after the presentation, we will have a Q&A session. So you have the opportunity to ask questions. Please also feel free to already post the questions in the question box throughout the presentation. And also, of course, at the end, yes, you are very welcome to ask any questions. So yes, with that, I would like to hand over to you, John.

Thank you very much, Kate, and again, very welcome. I would like to start with just taking the opportunity to provide some of the key highlights or the key takeaways, if you like, from the second quarter, starting with a bit on the macro situation. As we all know, it's a continued uncertainty on the geopolitical arena. And as sad as that is from a macro perspective, it is nonetheless a strong driver for pushing the need for European products, European cybersecurity in particular. I think it's worth to state as well that the growth we are seeing not only this quarter, but the previous quarters as well is still not impacted that much from the geopolitical uncertainty. Until concrete orders and concrete demand trickles down in the supply chain, it is still some time. So the growth we're experiencing right now is based on activities, I would say, over the past few years and not reflecting the current situation. If we look at the business, the growth this quarter comes from all our business lines, which I'm extremely pleased to see. That goes for our civil business as well as for our defense business. The gross margin, strong in the quarter, above our setout goal. And as a consequence, of course, the bottom line is showing an improvement as well. Last takeaway message from this quarter, which I think is really important looking forward is the ability for Clavister now to attract partnerships. We've announced a few in the quarter already. And we see that as a trend essentially where partners and businesses across are showing more attraction to Clavister, and I'll come back to that. If we look at the growth, again, it comes from all the areas. The order intake grew with 52%. So a strong order intake growth. No particular individual large orders in the quarter, which I think shows a really good robustness in the underlying business. Consequently, net sales provided good growth as well, 22%, 25% adjusted for currency effects, so amounting to SEK 55 million. And again, both from the order intake perspective and from our net sales perspective, it is driven by all our business lines. Looking at our order backlog, we are increasing that one with this quarter, ending at SEK 375 million. Worth mentioning absolutely is that our order backlog now extends into 2029. So this means from a visibility perspective, we have really good predictability over the years to come. Going back to the comment and message about partners. So what we're experiencing in this quarter and in previous quarters as well is an engagement from our existing partner network that is deepening, I would say, by the quarter. Investments that are done in our collaboration with resellers, with distributors, with integrator partners, which essentially, I mean, by all means, it drives the presence we have on the market, and it lays the ground for additional growth from the extended and growing partner network. And on the same note, what we're experiencing as well is that we are able now to attract a little bit different tier of partners, partners that have until recently been out of reach for Clavister due to our limited size, limited brand and so on. But I think the combination we're seeing now, the perfect storm, if you like, with the uncertainty on the political arena, the increased visibility from Clavister and of course, the product portfolio, which is competitive, this has started to really attract a new tier of partners. And we look really forward to see how we can capitalize on that. Looking at the civil business. Again, I mean, the clear market drivers are coming from the geopolitical instability. There is a continued really, really strong push, not only from the industry as such, but from the political arena, from the agencies and so on in Europe to strive for a more sovereign Europe, reducing the dependencies of specifically American products. Again, this, of course, benefits the few cybersecurity vendors in Europe where Clavister is definitely one of them. The momentum is really high. We face an inbound request rate that is really increasing now and coming from both the existing partner network and as I mentioned, also from new types of partners. We see additional requests coming from end customers and actually on a level that we have not experienced before. Again, our focus remains on the mission-critical sectors and mission-critical applications. We believe that is still a very, very good fit for Clavister given what's happening on the market right now. And naturally, given our size, we need to be very selective in the domains we're addressing. One example of this is the energy sector. I think we've talked about that in previous quarters that the energy sector specifically is challenged by the rising amount of cyber threats. It becomes the natural target for an enemy that would like to disturb a country's sovereignty. As one example from this quarter, we have the ability to add a major quite large energy provider in Germany that adds to a set of energy customers that we have already. So we start seeing a good momentum, good repetition of customer cases on the energy side. Looking ahead then on the civil market, I think worth mentioning and coming back a bit to my first comment on the time it takes for the political situation to trickle down into concrete business. The engagements that we've started recently that we're starting now, naturally, they are large infrastructure projects. They take some time to design, to implement to roll out and naturally to see the impact on our numbers. That being said, we're creating really, really sticky long-term relationships with the type of partners we're engaging with. So it adds a stability, which I think is beneficial for us as a business. Moving on to a bit of a technology piece. Some of you are aware of the AI effort that Clavister has been pushing for a couple of years now. And as a bit of a background, we have our Clavister PASAD technology. That is our innovative AI technology that is the result of many, many years, 10-plus years of Swedish academia research and further within Clavister. This is a technology that is really innovative. It is able to detect what's referred to as zero-day attacks. In other words, attacks that have never been seen live before. Typically, this is a type of attack that is really, really difficult to detect and to identify and to block using traditional methods, anti-malware or intrusion prevention technologies. So you need some kind of AI technology to do this, and Clavister PASAD can do that. What really is a strong benefit of our technology is that this is a technology that is deployed on the Edge, meaning on devices that sits with the customer. We're not depending on any cloud or any large data center. We're not gathering big data, sending that to a foreign cloud somewhere to analyze, which obviously has massive consequences on both traffic, bandwidth and your sovereign -- data sovereignty issues. This means, all in all, that this technology is really well suited for mission-critical and highly secure environments where you cannot essentially have external communication. During this quarter, we had the opportunity to get an approval, a patent approval by the U.S. Patent Office for this technology. And this follows on the European patent or intention to grant as the formal statement is. That means that we have dual patents, EU and U.S. that is protecting our IP. And given that this is a sort of fast-moving business, we have to make sure that we have innovation as a cornerstone continuously in our business. Looking at a new really compelling defense product. It's part of our CyberArmour product family. It was a product launch we made during the quarter, the CyberArmour RSG-200 product. This complements our larger RSG-400 and -500 products that are being used by defense customers already. This is then, again, a ruggedized security product that is used for tactical, even mobile type of deployments. It has a really, really strong performance in regards to its footprint. It's a very compact box. It comes with the full security capabilities, the full firewall feature set that Clavister provides in all of our products. The typical use cases, this product would sit in military vehicles, in mobile command posts and even in unmanned systems given its small form factor. This is also an ideal product for retrofitting of older vehicles where you didn't build in security by design from the design phase, rather you would like some bolt-on security onto your target vehicle. The reception from the market has been good. We secured a first order from a Northern European nation. They are deploying this product as part of what I just referred to as a retrofitting or modernization program of their vehicle fleet. And we have solid interest from additional defense prospects on this one. We also announced shortly after the end of the quarter, a very compelling partnership with Saab. Most of us know Saab, of course, a leading Nordic defense and security company. The focus of this collaboration or this strategic partnership is to combine and leverage on the experience that Saab has in the defense market and that Clavister has in the security market and take the best of those 2 worlds to the market. The first joint product release was actually this Monday, where we, together with Saab announced the TactiGate XD product. This product is what is referred to as a cross-domain product. Essentially, it manages classified information that needs to pass from, let's say, a NATO secret information domain or a NATO restricted information domain to another classified domain. This is typically something that is managed by large clumsy devices today, whereas we and Saab come in with a slim, really neat little product that takes all of the capabilities from the Clavister CyberArmour product family, all the capabilities from Saabs components into a very, very compact form factor. We claim that this is the smallest footprint on the market, which means that when we're looking at the land domain, vehicle domain, this is an ideal product for those type of vehicles. With that, leaving the word to David to talk us through the numbers.

I mean thank you, John. And I'd say that I'm suffering a bit from a cold. So my voice might be a bit rough, so you have to bear with me. But as John said, I mean, we're seeing a solid order intake growth in this quarter. And we're seeing this growth coming from all parts of our business, which is, of course, very good for us. So I -- and I think when looking at the bars in the graph, it's quite interesting to see here that we're managing to deliver SEK 76.2 million of order intake in this quarter, which looking at other bars where you see very high order intake numbers, that has been supported by single large orders typically from BAE Systems. We have no such orders in this quarter. And that is, as John alluded to earlier, I think showcasing an increasing robustness of the business where we see orders coming from all parts of our business. And that together generates a larger overall order intake. So that's very positive. Again, this then looks -- looking at our net sales. We're seeing that, I would say, continue to deliver on what we have stated, a bit above 20% net sales growth. And I think worth to remember, this is all organic growth. Clavister has no M&A that are supporting these numbers. So this is organic growth as before, showing also supporting the growing net sales trend line. And I think we're seeing more and more quarters now coming in with some good margin above SEK 50 million in net sales. So that's positive. ARR-wise, and I think this is, I think, important to state also for those who participated in the Q1 presentation. We then said that, as you see here in Q1, we had a dip in ARR. We said then also that this was associated to life cycle events when we did really the change of the business model back in 2021. That created effects in 2025 on ARR numbers. And as we said then, that was a onetime effect. I think we proved that by now saying that, okay, in Q2, ARR is back on its typical growth trend. So I think that's positive just to see that, and it underpins what we said before. Gross profit-wise, I would say, a strong improvement of gross profit in this quarter. So we're I think -- and this is very important. We're producing 22% net sales growth, but also producing an 81% gross margin. And I face quite many people asking the question and having the view that growth means that we will not reach a gross margin target of 80% or above. And I think we have been saying that, no, that's not the case. We can have growth and we can have strong gross margins, and I think this proves this. Of course, as we've said before, growth puts the margin under pressure because typically, that leads to more hardware shipments. But it still means that, okay, there is a growing recurring revenue base, which gives margin support. And of course, there will be different sales mix in different quarters. And here, we see a quarter with strong growth, but with a lot of -- also a lot of software in the sales mix, hence, landing in a strong gross margin. So I think that's, I think, good, and it proves that Clavister can grow with maintaining strong gross margin. So this is something that we're very pleased with. Well, looking at operating leverage and looking at OpEx, as you know, we stated some time ago that we have -- are no longer focusing on cutting costs, but rather investing in being -- in our ability to capture a good market that is becoming increasingly favorable for Clavister. So this is what we see here. The main growth drivers for OpEx is investments, well, controlled selected investments, but still investments in mainly sales and marketing and to a certain degree also in our tech organization, being able to -- enabling us to grow better. But I think it's also important to state that we have SEK 2.4 million in nonrecurring OpEx in Q2, and that is mainly related to cost optimization. So -- and I think this is also important. I mean we are investing in a growing Clavister, but we keep a frugal view on spending and looking harshly at do we need an organization looking exactly as it does or can we extract cost saves by doing changes in the organization and that we have done in Q2, which means to -- some reserves then for cost optimizations that will lead to a structurally lower OpEx in 2026. And I think just as a final comment, if you adjust for those one-offs for cost optimizations, the underlying OpEx increase is not 19%, but rather 13%, 14%, which is then well under the growth rate of net sales. EBITDA, a 60% growth in adjusted EBITDA. I think we're -- continue to see a growing EBITDA trend, which is, again, very positive. Main drivers for the improved EBITDA is, of course, the sales growth combined then with improved margins and somewhat dampened then by the reserves for the costs for structural changes. Kind of a last comment here is, okay, how are we performing versus our financial ambition. So ambition #1 is, of course, a sales CAGR of at least or above 20%, and we are delivering on that landing on 22%. Glad then to see I'm repeating myself there, but with the gross margin coming in above our target of 80%, where we land on 81%. Adjusted EBITDA margin, not fully reaching the 20%, landing on 16%. Would we adjust for -- but I think we are seeing that the margins are kind of gaining more support from growth, from protected gross margins. So I think we will see EBITDA growth as we're moving forward as well. Cash flow-wise, here is an area where we're actually not meeting the ambition of positive operational cash flow. We have a slight negative cash flow from operations in the quarter. That is mainly related to the fact that -- well, there are 2 main drivers here. One is, well, a little bit of higher inventory levels because inventories, as you might remember, we had very, very high hardware shipments in Q1. Hardware deliveries increased with more than 100% in Q1, putting inventory levels, of course, being quite low when leaving Q1. I would say we're leaving Q2 with more normal inventory levels. So I would say there's not a dramatic buildup in inventory, but rather being on more sustainable inventory levels. Second impact is, well, the good growth we saw in the quarter have then translated into more accounts receivables that will then turn into cash in Q3. So there's a kind of temporary effect of binding more operational, oh, sorry, operational -- operating capital really. And that will -- that is only kind of short-term effect that will translate into cash in Q3. So I think I'll stop there.

Okay. So let's go over to the Q&A session. I've seen there have already been a few questions that have come in. Please keep them coming in. Yes, we're happy to answer your questions. So let's -- looking at the defense area. We have a few questions around defense. One is, how big a part of the overall turnover do you think the Saab collaboration will be? So I think this one is for you, John, yes?

Yes. I mean, clearly, and I think you all understand that we're not speculating or even disclosing any sort of projections we might have. I think it's fair to say that the underlying reason why we and Saab decided to partner up here is -- I mean, first of all, it is a strong growing demand on the market for this type of product. That demand comes mainly from the overall digitalization of vehicles or systems on the battlefield. And given that sort of that digitalization then drives more classified information that needs to flow through the system, apparently, that also drives the need for protecting that information. Now for a company like Clavister, being able to partner with a large vendor such as Saab with a market reach that is, of course, many, many, many times larger than our own, that is a great opportunity to reach sort of new areas or new customer groups that we are not able to do on our own. So that's really the reason from Clavister point of view. From Saab's point of view, of course, you might wonder why Saab would select to work with a much smaller vendor like Clavister. Again, looking at the capabilities and the technology that Clavister is providing, again, realizing that there are very, very few vendors in Europe that sits with this type of technology that Clavister has. The other few ones are already part of major company groups maybe even directly competing with Saab in some areas. So having 2 Swedish companies collaborating is quite natural. And from a product point of view, the technologies really, really add on each other. So it is really a strategic, very good partnership. That being said, we are in the beginning of a product sort of rollout or a product marketing effort here with the first product just launched. Both we and Saab have great expectations that we will be able to capture interesting customers on this. To what extent that is a substantial part of our revenue in the next year or 2 or 5, I would say that's still to be seen. But clearly, we would not and Saab would not have done this partnership unless we believed in that it will create revenues for us.

Thank you, John, for that. We have a follow-up question around Saab. A question about we had communicated previously that we will have a collaboration with one of the major defense players in Europe. We hadn't named the partner at the time. And if this was Saab or if there is any expectation of another partnership coming up?

I think we should actually move or zoom out a little bit and look at what's the strategy for Clavister within the defense arena. I think you've seen in our previous communication that the majority or almost all of our communication has been related to working with defense contractors of various sizes. BAE Systems is the most named one, obviously, but also General Dynamics and a few others that we are not able to disclose due to defense confidentiality. Saab is clearly one of those defense contractors, but we do have commercial engagements with a couple of others within Europe that are actively using Clavister products on an operational basis next to BAE Systems and next to our proof-of-concept work with General Dynamics. So if we look at the long-term or midterm perspective here, our ambition is to repeat what we have done successfully with BAE Systems on the CV90 on other defense systems as well. And we've come a bit on that trip. So we have several defense systems that are using our products, and we clearly want to see them scale to the same level as we've been able to scale with BAE Systems. Hopefully, Saab can be one of them.

Okay. I think that covers a lot of -- there are a lot of small follow-up questions around, yes, partnerships or the future partnerships. So that's -- I think that's covered that very well. A question of still in defense. And what is the status on the joint order from the Baltic countries plus Sweden and Norway regarding the CV90?

Yes. So you're referring to the so-called Nordic Edition that has been announced in media. And as a background for those of you who don't know, this is an initiative between Sweden, a few other of the Nordic countries, the Baltic states, a couple of them at least and a couple of other nations. The ambition is to procure a larger volume of infantry fighting vehicles. And this effort is coordinated and led by the Swedish Defense Material Administration, FMV. And the BAE system CV90 is the strong contender for these initiatives -- initiative. As far as I know, there has not been any commercial contracts signed yet between the vendor, in this case, presumably BAE Systems and the procurement agency. But I think they are well underway.

Okay. We have another question towards General Dynamics. How is that progressing? And how can we expect this to materialize into a concrete business in the near future?

I think the relationship and the engagement with BAE -- sorry, with General Dynamics follows more or less on the same pattern as our engagement with BAE Systems. What do I mean with that? Well, keep in mind that the relationship with BAE Systems started many, many years back with initial engagements on evaluating technology, building proof of concepts, looking at integration possibilities and naturally commercial discussions that were lengthy. And then at the end of the day, the triggering point for commercial orders always sits not with the contract manufacturer like BAE Systems or General Dynamics, but with the sort of procuring end nation, the counter that essentially buys the infantry fighting vehicles. We are, I would say, in the -- in lack of better words, on sort of the mid of that journey with General Dynamics, where we have arrived with a clear value statement to them. They have evaluated the technology similar to what BAE Systems did back in the days. We have built proof of concepts with them. And just a couple of months back or just shortly before summer, our products were also installed physically in the ASCOD vehicle that General Dynamics is producing. So I would say we're very much at the level now where a commercial order placed by a nation to General Dynamics could very well then translate into an order to Clavister. I think that's the way of answering that.

Yes. Thank you, John. So coming away like talking about the defense business. So the question is based on all the recent progress in defense, is it a fair observation that most of the revenue comes from this sector? And we have a similar question. So which segments do you see the strongest drivers to achieve business growth? So can you elaborate on that?

David, would you like to take that?

I mean if we take first -- I mean, it's a very good question. So -- and I understand that. So no, the revenues does not mainly come from defense, rather contrary. So the vast majority of Clavister revenues comes from our civilian business. But then on the other hand, we're winning quite many orders and large orders in defense or the majority of the order book is defense related. So I would say that the combination here of a -- to a high degree, recurring ARR-based civilian business together with a large and growing order book with a lot of -- not only but a lot of defense in it, which then translates to revenues over -- as we have said, until 2029 based on the order book as it looks right now, that means that's a good foundation for growth going forward. And then, okay, so where -- what are drivers for our growth? Well, increased geopolitical risk, a growing digitalization of society. And that combination, of course, if you digitalize in order to extract efficiencies, you also increase risk. And that's kind of the other side of that coin. So if you digitalize, you need to invest in more cybersecurity. And then, of course, if you're seeing that, okay, the world is becoming more complex, who do you trust? Where do you -- and realizing that, okay, Europe lacks a large cybersecurity industry, a very high degree in Europe rely on U.S. and Israeli technology. And I think more and more decision-makers are realizing that, that is actually a problem. We need to be able to secure ourselves with technology that comes from Europe. And that -- I think that combination is then very good for Clavister, not only in defense. I think that's very important to remember, but in protecting a society in a much wider scope, water distribution, energy distribution, that schools can uphold education for children and so forth, all that is positive for us. And icing on the cake is, of course, investments in military platform, but that is a smaller part, but of course, important and growing part. So a bit long wind, do you want to add something from that?

No, I think that's a good response.

Okay. Thank you, David. So staying with you into a bit some more financial targeted questions. Can you please describe how much of the order book that is recurring turnover and how many years you are normally having in the order stock?

Okay. So in the order book, we see mainly, as I said before, mainly, not only but mainly defense-related orders. These -- and they are then mainly related to BAE Systems, where A is from -- from when we gain an order, it will sit roughly maybe 18 months, 2 years before we start delivering on that order, then it falls kind of a bell curve shape where deliveries are smaller in the beginning, they -- and bigger in the middle and then they kind of ease off. Takes roughly 4 years for such an order to be fulfilled. And so they will then give revenue support for quite a long time, and we have a situation where we're building more and more orders. So meaning that, that will gradually build up and lead to increasing revenues from that order book. But they are typically not recurring. The defense orders are not recurring revenue. But on the civilian side, on the other hand, almost everything is recurring revenues. But they typically don't sit in the order book for very long. They are delivered more or less instantaneously as we take that order. So the recurring revenue parts are hitting our revenues much more quickly. And I think that combination is very good for Clavister because you win -- we have a good momentum in the civilian business that translates into revenues quite quickly. They are recurring, and we add then a growing order book in defense, it takes time to fulfill it, but that means that the growth risk of Clavister is dropping quite rapidly.

And to complement on that, David, it is absolutely true that the defense orders typically are perpetual or nonrecurring at the moment. That being said -- and the reason for that is, obviously, the defense market as such is quite a conservative industry that is quite recently undergoing this digitalization phase and are historically used to buy completely different type of products where a recurring element is not common at all. That being said, that industry is, of course, as well looking at modernizing itself and looking at how can a more recurring element be introduced. Naturally, we are pushing on that. That's in our interest and in our benefit. Also, if we look at parts of the defense sector or defense market for us where our software is being delivered as software-only components, then we have experienced that it's easier to drive a recurring narrative when we're shipping only software rather than we're shipping integrated complete hardware platforms for integration. So over time, I'm convinced that we will see more recurring. But exactly as David said, currently, it's nonrecurring mainly on the order book.

Yes. And adding to that, making a long answer even longer, well, you should take a chance and we get it. I think we can say that the defense customers because these are very sticky solutions. So if you could integrate it in a system, it's not contractually recurring revenue, but we're adding customers where it's safe to say that there are customers with a recurring buying behavior. So it is likely that this will translate into more orders related to different type of software upgrades because these are perpetual orders. The lifespan of the system means that since it is perpetual, you will need to come back and upgrade the capabilities of the software over time, likely also adding support elements and so forth going forward. So I think it has that element to it, and that is not reflected in the order book.

Good. So another question is, given your target of more than 20% annual growth and a positive EBIT in 2025, what concrete milestones or leading indicators should investors track over the next 12 months to assess whether Clavister is on course? And how do you plan to balance growth investments with the risk of further dilution?

I mean I can start. I think it's a very good question. I think -- first of all, I think we should be evaluated on several different metrics. One is, of course, the ability to keep the growth target of above 20% to keep delivering on that. So I think that is highly important. Then adding profitable growth to this, reaching positive EBIT and growing EBIT translating because it's -- I think it's important in our mindset, it's important to state that we're looking for growth, but it needs to be profitable growth that generates positive cash flows. And of course, then balancing that, and that's an important trade-off that I think we are investing a lot of time in, how much should you then prioritize further and additional growth at the expense of EBIT and cash flows. And I think that is an important trade-off that we are spending a lot of time in monitoring and finding the right balance. So I think evaluate us on our capacity to grow and our capacity to grow with profitability. I think that's what we're looking for internally.

Okay. Thank you, David. So just taking a more broader and broader outlook, what step is Clavister taking to foster proactive cybersecurity culture within organizations? And how are you empowering your clients to stay ahead of sophisticated threats like zero-day attacks or ransomware?

Very good question. The good part here is that we're not alone as a supplier to educate or to drive the narrative of cyber hygiene within our clients or within the industry. On the opposite, I think we have a lot of people working for us in this matter, looking in Sweden alone, looking at our politicians that have moved from basically being nonaware of cybersecurity to driving the agenda, looking at our Ministry for Civil Security, for instance, pushing the cyber agenda really, really hard. So I think there's a lot of movement in the society that talks for us on this. What do we do then specifically from Clavister side? I mean, naturally, we're increasing our marketing efforts in a pace, a little bit alluding back to David's comment on profitability that naturally, we would like to be even more out talking about cybersecurity and Clavister's offering with much more marketing efforts. That comes with a cost. We have, of course, our constraints. But that being said, we are quite aggressively increasing our marketing spend if we look year-over-year over the past years. And I think that has been visible as well on how Clavister has broadened its brand. On top of that, we actually engage quite frequently in the political debate. We take the opportunity to try to influence the overall debate on cybersecurity, naturally with sort of the limitations we have in bandwidth being a small vendor. But again, we're being a lot helped by the overall push in society right now.

So maybe staying in this area, I mean so given the -- yes, given the increased demand by the need for European solutions, what is Clavister's competitive edge versus larger international players?