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

Good morning, everyone. Welcome to our Q3 interim report presentation. With me today is our CEO, John Vestberg; and our CFO, David Nordstrom. And we are going to present the Q3 report to you. So we'll start with the presentation with John providing financial and business updates and followed by David's part on the financial details. And after the presentation, we will have a Q&A session. So you will be able to answer any questions -- post any questions you have before and we will answer the questions in that session. So yes, please feel free to post questions during the presentation in the question box, and then we will get back to the questions after that. So yes, with that, I would like to hand over to you, John.

Thank you very much, Kate, and a warm welcome, everyone, to this Q3 presentation. As usual, starting off with a summary of the past quarter, starting with actually what we refer to as a key profitability milestone. So this is an interesting important milestone where all of our profitability metrics are showing good performance. So we were able to demonstrate our highest ever EBITDA margin at 26% ever, also showing positive EBIT and positive net result, all together combined with a strong gross margin. From a business perspective, we continue to expand on our European footprint. We do this mainly through new partnerships. And as a reminder, for those who might be new to Clavister, the Clavister's route to market is typically through partners. That's why we place extra emphasis on important partnerships such as the one we announced shortly after the end of the quarter, an extended distribution agreement with Arrow Electronics, which I will talk more about in a while. We see overall a strong momentum in the business, defence being no exception. The flip side of that coin is some supply constraints that the overall industry is experiencing and also affecting Clavister to some extent, also getting back to that in an upcoming slide. All in all, as a summary to start with, we believe that we still are very strong positioned for future growth. The demand as such for European cybersecurity with an emphasis on European is increasing by the day. And we sit as one of the very, very few European cybersecurity vendors that can demonstrate the type of product portfolio with the width and depth and capabilities that are really appealing to the target markets we are addressing. If we look at our -- some key metrics and sort of the underlying importance of those with the headline resilience in the business model, what do we mean with that? Well, starting off with our order intake amounted to SEK 31 million. It's actually a slight decline, 9%, stemming most or primarily from the timing effects from larger orders in the defence sector. So as a reminder, as we serve both the civilian and the defence sector, I think we have a good hybrid mix of characteristics in our business, whereas the civilian business typically is dominated by quite a high volume of contracts with smaller average deal sizes, but distributed over very many partners and very many end customers. Whereas in the defence sector, it's more or less the opposite, larger contracts, longer lead times, and more lumpiness. And this is a quarter where that type of lumpiness comes into play. Despite that small decline in order intake, we were still able to demonstrate 15% growth of net sales, 17% adjusted for currency effects. And I think this is a good example where it demonstrates both the hedging capabilities we have in the business model and that the business model as such stays very resilient even in a quarter with slightly lower order intake. As such, the order backlog we have now stands at SEK 361 million. It's more or less on the same levels as the previous quarter. And it keeps extending into 2029, which means that we have extremely good visibility, good predictability from the deliveries coming from the order backlog over the next coming years. Moving then over to a bit broader perspective, looking at the market situation and some macroeconomics. What we've learned from looking at maybe not colleagues in the business, but other IT areas complementing or adjacent to the cybersecurity industry, seeing that we are, as an industry, experiencing a bit of a cautious investment behavior. When talking to the industry -- when talking to industry peers, it seems like the common denominator is the overall geopolitical uncertainty. The -- I mean, the tariff conditions from the U.S. is probably one of the best examples. So some kind of hesitation that postpones IT projects to some extent. I believe we are affected as well of this environment, but to a much lesser extent. I think the situation is hedged that from the perspective that cybersecurity is such an important investment area. So even though you have to postpone some other type of projects, you're not postponing cybersecurity in the same degree. It's too risky basically. So that's an outlook into the economy. If we then look at another important aspect is still from the sort of bird's eye perspective, looking at the European digital sovereignty. What we're seeing and have seen for quite some time, but in an increasing pace right now is a Europe that steadily moves towards a so-called European digital sovereignty. In essence, the ability to be less dependent or independent from non-European technology. It goes without saying that this type of move is, of course, extremely positive for the entire European vendor ecosystem, cybersecurity being no exception to that. There is one very concrete example for those who enjoy some nice bedtime reading. This number referred to now in the screen, it's the EU's report on European technological sovereignty and digital infrastructure. This is a report that was actually adopted by the European Parliament this June. And it points out some very interesting recommendations. I picked up three of those. One being that the EU actually proposes in this report that a share of public procurements should be reserved for European companies. If we take this into perspective, looking at how other nations or other continents are doing this. In the U.S., strategic procurements are reserved to 70% for American companies. In China, maybe to no surprise, it's reserved to 100% to national companies. And this to be compared then with the European Union, where only 10% of procurements, strategic ones are going to the European vendors. So there is a lot of growth potential coming from a recommendation like this. For a security vendor like Clavister, potentially the second recommendation here is even more important. So the report actually recommends the European Union to introduce a so-called cybersecurity criteria for public tenders. In essence, the idea is when you have a public tender and the public tender relates to or concerns sensitive data or security critical data, you should be able as a public tender to appoint only European vendors from a cybersecurity perspective. So in essence, disqualifying non-European vendors. Naturally, that's extremely important for the European cybersecurity business. And finally, there are many, many comments or recommendations in this report, but a third one, which I found very interesting. The recommendation is to introduce actually tax incentives for private investments into European technology providers. So all in all, when -- if or rather when these recommendations are turned into legislation might take a year, it might take a few years, but I'm certain it will come, then this changes the vendor landscape entirely in Europe on a positive note. Talking about our partnerships and the continued expansion. So we announced short after the end of the quarter that we have extended our distribution partnership with Arrow Electronics. Arrow Electronics is one of the largest IT and electronics distributors in the world. Up until this point, we have been having Arrow as our distributor in Sweden. With the new agreement that we've extended now with Arrow, we are adding additional 11 countries to our distribution collaboration. So we're adding the other Nordic countries. We're adding the Benelux countries, we're adding Poland, and we're adding the Baltic states. And this, just to clarify, sits on top of the already established all by smaller distribution partners we have in the other Western European countries. It's worth to say -- important to say that since we engaged with Arrow in Sweden some years back, our collaboration with them has been really, really important to drive the double-digit growth we're seeing on the civilian security sales in Sweden. So it goes without saying that our anticipation with this extended partnership with Arrow is to drive the same type of growth going forward in the other European countries. Moving then to defence sector, titled High Activity. And I think that's a good framing of what we're seeing in the defence sector right now. So all in all, we see strong interest and demand for our cybersecurity solutions for defence. We're both expanding and deepening our existing relations, already existing contracts and partnerships, but we're also entering into new ones. To no surprise, everyone knows this, the investments in the defence sector is, of course, growing dramatically by the year. To just showcase some examples just within the European Union, last year, EUR 343 billion were spent on defence initiatives. And this number is expected to rise to EUR 381 billion this year and continue to grow significantly thereafter. There is an initiative that was launched by Ursula von der Leyen, so-called Readiness 2030 plan. This plan aims to allocate EUR 800 billion additionally for defence investments in Europe. And also at the previous NATO Summit in the Hague in June, the member nations of NATO agreed on a quite aggressive goal, reaching 5% of the GDP by 2035. So obviously, that translates into huge defence investments. Cybersecurity specifically is, of course, an investment area that is growing as fast, probably faster given that the defence industry is starting from quite an immature level of cybersecurity. So all in all, this should present good and strong growth opportunities for us going forward. This is also, of course, one of the reasons why we're broadening our product portfolio. Apart from our military-graded firewall products, the joint product development we announced earlier this year with Saab on the TactiGate cross-domain product. That is one example of us broadening the product portfolio to take and capture a larger share of the upcoming market expansion within defence. The flip side of the growth in defence is the challenge of supply chain. So what we're seeing, what we're learning, and this is an industry-wide challenge that the production -- the scale of production is really not picking up and scaling fast enough to meet the high and increased demand. So this is a situation starting to look a little bit like the COVID situation with supply chains being impacted in this case, presumably on a positive business reason with the increased demand and not because of some virus, but regardless, it is affecting the entire defence industry. Specifically for Clavister, we've experienced, we're seeing that some of our military hardware suppliers are struggling now to meet the required delivery time frames we have in the short term. So more -- even more specifically, we have quite a significant set of deliveries that we're planning for the fourth quarter this year. Those deliveries are facing a high risk of being pushed over to Q1 next year, and that will naturally impact the growth level and the EBIT level for the full year. So to be transparent and clear on that, we have been -- we have decided to remove or withdraw our full year growth and EBIT targets for 2025. But very important, though, to state and to emphasize that this is purely a timing issue. The underlying orders and the underlying business are not at risk. We're looking at a quarter of shift in time. With that, over to you, David, to talk us through the numbers.

Thank you, John. So as always, we start with order intake. And as John alluded to earlier, we see a slight decline in order intake. And just to get some perspective of that, if you kind of look at the bars in the picture, you will clearly see that Q3 stands out being the order intake weakest quarter for Clavister. So this quarter follows kind of a seasonality trend. And then that's -- and Mike asked the question then why? Well, our main business is in Europe and throughout Q3, both our employees, but more importantly, our customers and resellers are on vacation, meaning that the activity levels, especially within the civilian business is lower in Q3. And when working with larger projects, they tend to focus on -- even though we were working on projects in Q3, they are tending to close in Q4, which you will also see if you look at the seasonality in the business, which is typically always highest in Q4. So I think this follows the trend. And in this quarter, we have had a lack of larger orders within -- especially within defence and telecom, which are lumpy by nature. So I would say that explains the slight decline in order intake in the quarter. If we move forward then to net sales, the decline in order intake have a certain impact on net sales as well because a certain degree of the orders that we generate are also turning to deliver very quickly, especially within the civilian network security business. So -- but here, we're demonstrating a 15% net sales growth. Adjust for FX impact, it's 17%. So slightly below our trend line. We would have liked to see somewhat more growth. But I think knowing that this is in Q3, which is a more challenging growth quarter based on the vacation effects, I think we're still looking at a quite decent growth in the quarter and then adding our 16th quarter of consecutive growth here and keep pushing the growth trend line upwards. So the growth trend continues. And I think Q3 has always been a little bit under the growth trend. That doesn't mean any impact on the trend itself. I think we are well positioned for continued growth in coming quarters. So this is a new picture for those of you who have been following Clavister for some time. We are often getting the question, and I would say, to a certain degree, the misconception that Clavister is mainly delivering defence business and civilian business to a lower degree, but it's actually the opposite. So I think this is, I think, us providing some new information here in the presentation, but also in the interim report itself, stating I mean how much of the business volume is coming from defence. And we see that those volumes are growing, following a quite good trend line of growth in the defence business, combined with the civilian business, which trend-wise is also growing. Currently, 82% of the Clavister sales are coming from the civilian business. However, if you're looking at the order book, the mechanics are the opposite. Then you will find in the order book that the majority of the order book is defence related, meaning that it's likely that defence sales in absolute numbers will grow in the coming periods. Then of course, the civilian business is growing as well. So the proportion of defence sales versus civilian sales going forward is a little bit hard to have a kind of a clear view on. I think what we can say is it's likely that the defence part of the sales mix will likely increase going forward. But I think the civilian part is still the lion's share of our sales. ARR-wise, the growth trend of ARR is continuing. I think in Q3 with kind of what I alluded to before, it is a little bit more challenging to grow ARR with double-digit numbers. And then why? Well, there are two answers to that question. One is business is generally a little bit slower in Q3 as it is, again, a vacation quarter. And then for us to record ARR, we need to have a sold contract, then we record net sales and order intake. But for us to also record ARR, we also need to see that the contract is started. And then you have a lead time on average of 30 days. And during summer, less contracts are started because people are not working as actively as they do in other quarters. So that has a dampening effect on ARR growth, specifically in Q3. Gross profit-wise, landing on a -- and I think this is now interesting because if you look at the picture of defence sales in the sales mix, these were growing in Q3. And despite the fact that defence sales were growing quite a lot as a proportion of total sales, still managing to provide an 80% gross margin. I think that is, I would say, a strong margin given that sales mix. And I think what we can conclude from that is there has also been a misconception that defence sales equals low margins. That is not necessarily the case. We have defence deliveries that are pure software or defence deliveries utilizing our civilian hardware, but uploading a perpetual cyber armor license, but then we generate much stronger gross margins. So I think this shows that we can have growth in defence and still produce strong gross margins and the defence business in itself can be margin strong. So I think these are key takeaways from this quarter. Operating leverage, looking then at -- I think this is something that we are quite pleased with. This is the quarter so far where OpEx in proportion of net sales reached 72%. That's the lowest OpEx to sales ratio so far throughout the history of Clavister. I think showcasing that we are able to utilize our cost base more efficiently, generating more business from the costs that we're already having. We did investments in a growing organization quite -- doing quite selected investments, especially in sales and marketing during the first half of the year. These were good investments. I think during Q3, our focus has been ensuring a good delivery capacity and good efficiency from these investments. I think this is something that we're showcasing also in these numbers for this quarter. And then if we then look at our EBITDA levels, reaching our so far highest adjusted EBITDA level. The adjustments are low in the quarter, only SEK 0.4 million. So the delta between adjusted EBITDA and reported EBITDA is low, but adjusted EBITDA reaching 26%. I think showing that we are continually pushing the profitability trend upwards. So pleased to see that. Yes, John. Yes, sorry, so moving forward.

So thank you, David. So with that, going into the final part of the presentation, just summarizing with our outlook for the future. So again, a bit of a reputation. So we strongly believe that we are well positioned. I think we're showing that from our track record over the past few years on this market that are interesting for several reasons. I mean, not only the overall underlying growth of cybersecurity investments, but also the current -- I wouldn't call it a trend, but the strong movement towards the European digital sovereignty that together plays very well for Clavister and of course, for the other, again, very few European cybersecurity vendors. We've built over these years a platform which we believe is really solid now to build additional growth. It's not done. We still have to do selected investments in sales naturally to drive growth and to some extent, in additional R&D to fulfill our delivery plans. But all in all, the product portfolio is already strong. Keep in mind that over these years, we've invested in the magnitude of EUR 100 million in software R&D, most of which have -- most of which are still a strong contributor to our sales generation these days, very, very small amounts of sunk costs, quite unique in the software industry, to be honest. But then with the partnerships, we're expanding, growing our presence internationally, mainly in Europe, that is. And through those partnerships, deepening the relations to the point where they are not only relevant for us as a vendor, we are increasingly becoming relevant as a vendor to them, especially in the context of the European digital sovereignty where many partners traditionally have built their business with American vendors seeing a future now where that might be a choice that needs to be revised and finding alternative suppliers. And commonly, we see in our dialogues with customers, prospect customers that Clavister is showing up on the radar even for customers and partners that we have had previously no relation, no experience with at all, and that's a strong and good sign. Naturally, we will do this with a focus on profitable growth. So I think it's clearly demonstrated on the EBITDA slide that David just showed that we continue to drive our profitability metrics. This quarter is a strong proof point that we are succeeding with that. We are not at the end game. We're not at the final target of EBITDA margin, even though it was the highest ever, but it's a milestone on the way. We need to focus more on delivery capability. We are getting questions naturally with regards to the supply chain situation, what Clavister is doing to mitigate those issues going forward. I think we can be fairly confident that the defence growth, the defence industry investments will continue. So it's really important for Clavister to take ownership of that situation. And we're doing that by broadening our supply base by investing and optimizing our own operational execution ability so that we can act as the product owner that we truly are in the defence area. So all in all, I think we are geared for a strong position for building additional growth. With that, I think, Kate, we're leaving over to Q&A.

Perfect. Thank you very much, John and David, for your presentation. So yes, we have a few questions, but please write any questions you have in the question box. We're happy to answer anything that you might want to know more of. We have one question from the defence sector. So General Dynamics or Germany and General Dynamics signed a contract for 247 looks too recently, and we have signed as communicated our partnership with General Dynamics. So the question is what does this -- what are the opportunities here for Clavister? What does this new agreement bring for Clavister?

Absolutely. So I mean, I think everyone can understand that we can't comment on individual opportunities, individual deals that we have not ourselves talked about or announced. But I think I can answer this question in a more generic way. So a bit of a repetition, we started building our engagement with General Dynamics as one out of many defence platform providers that we aim to collaborate with. We started that collaboration a few years back and have continuously moved our position stronger and stronger in that collaboration, starting with initial dialogue trials into being a design win within the systems and moving to a point where a customer nation with demand for General Dynamics platforms also requiring cybersecurity, then Clavister is naturally then well-positioned to be part of those deals. When/ if those materialize to real deals for Clavister, naturally, we will be the first to announce those. So I think in general, alluding back to the strategy we have in defence, we've demonstrated good leverage of our technology in certain areas with certain customers, continuing to expand with other system providers or defence platform providers. And General Dynamics is clearly one of those we want to do more business with. And I think we can over time.

Thank you, John. So we've got a few questions around the financial details, a lot popping in. Let's start with one. Can you highlight the magnitude of the potential miss in Q4 at sales and EBIT level from the supply chain issue?

I can start. I think no, because it's hard to have a concrete view on what the impact may be. I think what we're saying is that we're seeing increased uncertainty. And since we're seeing that increased uncertainty, hence, we wish to remove the guidance on the EBIT and growth target because since visibility is lower, I think it's prudent to remove that in just being transparent with how we communicate. But hard to give an exact number. I have -- I can't really do that.

Okay. Thank you, David. What EBITDA margin levels are you aiming at if '26 is not maxed out, 26% is not maxed out?

But that's -- it's a very good question. I think what we can realistically aim for -- you can aim for very high targets, but I think what we will be aiming for is in the range of 35% to 40% of EBITDA margins. I think higher than that, I think then you could always go for profitability to maximize that, but then you have a trade-off in your investment capability in growth. I think Clavister, we will be aiming for a healthy profitable EBITDA margin, reaching that level, I think it's more value creating for shareholders to reinvest in growth. If growth was less important, of course, you could maximize the profitability metric further, but I don't think that's value creating.

What did cash flow positive mean in terms of range in the first place, i.e., prior to the profit warning?

I mean we are aiming -- the aim clearly was to generate profitable cash flows. And we have been saying for quite some time that operational cash flow and EBIT has more or less a 1:1 ratio. Of course, there are some fluctuations in the working capital levels that could have a short-term impact. But if you look at it on a little bit of a longer time period of a few months, EBIT and operational cash flow is the same. And when we then say that the EBIT target short-term come under pressure, hence, it is prudent to have the same cautious view on the cash flow metric, meaning that we are very near -- we had operational positive cash flow in the last quarter. We have it in this quarter. And I think we might as well have it in the fourth quarter. But then reaching it for the full year, I think, might be challenging due to if the uncertainties around defence lead times materializes, that might have an impact on the full year. But then that negative potential impact in Q4 as the corresponding positive impact on Q1 '26. So we're talking about quite small deviations in time, but a target for the 31st of December becomes very binary. So I think it depends on how you view that. Over a course of a few months, we believe that all that business will be in and that impact will be there -- the positive impact will be there.

So what orders in defence can be expected in Q4?

That's a very forward-looking question and statement. So I think it's prudent not to give guidance on what exact orders to be expected. So I think, again, this question deserves unfortunately, a more generic answer. So as you know, we are working with several different defence customers. And as I alluded to in the presentation, we're deepening the relationship with customers we have already, and we're extending with additional customers as we go. We are, of course, nurturing a number of business opportunities with those defence customers. And of course, we anticipate that we will be able to close some of them in the near future. Whether that happens in Q4 or later, that's to be seen. The challenging thing with defence compared to the civilian market, which again, I alluded to given the size of the orders and the lumpiness is that typically, we are not in the driver's seat being able to influence exactly when the orders even if we are chasing and pushing, it is at the end of the day, a decision that is taken typically at the Minister of Defence level somewhere, and that's naturally a bit hard to influence.

So as you mentioned, defence tend to be one-off projects where our growth comes from the civil segment. So how will you balance these two revenue streams to sustain margins?

Maybe I can start and David can pitch in. It is correct that what we have seen so far with the larger orders we have in the order book from defence and the ones we've been delivering on, they mainly relate to one-off projects or let's call -- let's not call them one-off projects. That's actually wrong. But it's true that we're looking at more perpetual type of revenues. But that said, those type of engagements are not one-off to the extent that you ship once and then you walk away and then you move to the next customer. We are typically looking at many, many, many years of engagements, in some cases, 30 years of life cycle management of the platforms we're shipping to, which means that there are continuous deployments, continuous deliveries. There are continuous extensions of those projects. And once you reach a certain milestone, the projects get converted into after sales opportunities with support contracts and maintenance contracts and professional services engagements. So there is a lot of also recurring type of or recurring profile type of revenue that can be gained from even those perpetual type of licenses. That being said, what we are also seeing, and I think David also alluded to this when we looked at the gross margin, our defence sales also sees a mix of some recurring revenue or subscription-based sales. We see especially in areas where the uptime is extremely critical where it sits in a system where the uptime is -- it can't be questioned. You need access to the data software, you need to be patched, you need to have the latest security fixes in place. And that, of course, means that the customers are increasingly willing to sign mandatory support contracts, which then adds a recurring element. So those combinations with a recurring type of profile, a software sales in the mix and recurring elements in that mix and subscription-based licenses, I think all in all, that gives an interesting mix even in the defence area that then blends into the more subscription norm, which is in the civilian side. I don't know, David, if you would like to complement something more there.

I fundamentally agree. I think let's reiterate. I mean you can have single quarters. I mean the impact on margins mainly comes from the product mix and where -- so the higher growth levels you have in hardware-centric deliveries in a certain quarter, that generates a lot of revenue because hardware is a good carrier of -- it get instant revenue recognition from the hardware elements. It's good for growth, and I think that's the most important part. But of course, if you sell a lot of hardware-centric deployments in a certain quarter, that could put margins under pressure in that individual quarter. But again, you're adding a lot of recurring revenue contracts to that because in civilian side, everything is recurring, which means that you have a better foundation to sustain margins going forward. And I think that's also where we're seeing that the business is much larger than if you go 1 or 2 years back, meaning that even though you have a lot of growth with hardware in a single quarter, the base of recurring software contracts in the bottom is also bigger. So that can act as a cushion for the margin where we have -- I myself have been a bit surprised by the resilience in the gross margins, and it's highly thanks to that.

So with a strong backlog, how much of the backlog do you expect to convert into revenue in 2026?

Yes. I mean this is actually now we're not talking about '26 specifically. We added -- because this is -- it's a good question. It's a question that we get more often. So this is something that we added in the interim report actually in this quarter and information about how much of the order backlog based on what we know when we issued the report is expected to be delivered within the next 12 months. So this is something you'll find in the order intake section of the interim report. And I think we're saying...

Close to SEK 100 million for the next 12-month period, SEK 92 million to be exact.

Yes. So reading on Page 5, SEK 92.5 million. But that's not '26. It is the coming 4 quarters, and that's how we will disclose this information. So we're not talking about a specific year, but the coming 4 quarters.