4C Group AB (publ) (4C) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to this second quarter earnings call for 4C Strategies. My name is Jonas Jonsson, and I'm joined here today by...

Veronica Wallin, and I'm the CFO for 4C Strategies. Good morning.

So great to have people joining. We will take you through the presentation of today's quarterly report, and we are happy to take any questions. Please write them in the chat as they -- as you will, and then we will take them as we progress through the Q&A section at the end of the presentation. Just checking to see that everything is working. Right. Okay. So in terms of a presentation of today's quarterly report. So the second quarter for 4C Strategies is always a busy quarter. There's a lot of outreach activities going on, and we've also got quite a lot of delivery ongoing, which is a really positive thing for us, obviously. We've been working hard with our product optimization and innovation. I'll come back to a little bit of that, and you read about it in the report as well. We have conducted numerous sort of outreach activities together with our customers at trade shows around Europe and around the world. And we have also conducted our annual user forum with our defense customers from around the world. So a positive quarter. We've seen the training activities come back up to the volumes that we were expecting from a slightly slower start at the start of the year in Q1. And then obviously, of course, we closed a slightly major deal at the end of the quarter together with some customers in the United Kingdom. So we'll come back to that as well. But yes, please type in any questions that you have, and we'll take you through this presentation. So looking at the numbers then, we closed out the quarter at SEK 95.4 million net sales, which is with a software revenue of 67%. So a strong uptake compared to last year's quarter 2. We had an EBIT of SEK 13.2 million and an EBIT margin of 14%. So a recovery quarter, I would say. We are still trailing a little bit behind if you look at H1 compared to where we were expecting to be and where we were last year. But all in all, I would say a solid quarter, obviously supported by revenue from the final closing deal back in June. But also, as I mentioned, exercise activities coming up, which has been supporting both software and services revenue, our Expert Services delivering according to plan and so on and so forth. So a solid quarter and a good change compared to where we were at the start of the year. You can also see that our costs are now at the levels that we were expecting them. So our cost saving program has now come into effect, and we can obviously see that impacting our operating margin. So starting off with the contract that we announced on the 29th of June. We're still in a position where we need to be reasonably closehold in terms of information around this, but a significant win for 4C strategy, it's something that we've been working on for a really long time, and we're obviously very, very proud about how this played out. Being able to sign a contract of this size and this duration is not something that happens to us every day. And we're super proud to be able to enter into the delivery phase of something that, as I said, we've been working on for a really, really long time. So it's approximately GBP 55 million spread out over a 15-year period. It's a fixed price contract that comes with indexation though. So we are expecting it to grow over time. There is significant opportunities within this contract as well to expand into wider opportunities, but also then to see how the delivery of this can frame deliveries in other countries around Europe and the world to build additional new opportunities as well. Now the United Kingdom is one of our core markets. The U.K. MoD is now again and still is and has been for a long time, our biggest customer. And I think that the confidence to be able to win a contract like this from the customer side is something that we've built up over a really long time. So we are -- we're super happy about that. We will be delivering this in parallel with our current and previous contract within this space over the next 2 or 4 years, depending a little bit on how it plays out. So we are expecting this to be a significant positive contribution running over time and give us that continued solid foundation to build on in the U.K. and Europe. So really, really positive contract, a long-term commitment, solidifies our position within the training domain in the United Kingdom. Looking slightly wider at the defense space then, we can see, as I mentioned, that our software and supporting revenue have gone up to the levels that we are slightly more normal levels. We had a strong development in EMEA, obviously supported by this contract at the end of it. We do see a continued strengthening position across Europe. And also that the market momentum is improving even though the execution is still uneven, and there are a lot of bottlenecks in terms of procurement and in terms of the way that we are able to contract. But I would say that we've finally seen the defense investment plan in the U.K., which is basically the execution of their defense budget. So we are expecting increased momentum in the U.K. during the second half of the year in addition to what I just mentioned. We are seeing that training investment budgets are now going up at a rate that they have not done before. And if you look at both in the U.S. and in Europe, money allocated for the specific areas in which we operate are increasing in budgets, both for 2026 and 2027. And we are working on a number of deals which are to be closed in the near future around -- well, basically all 3 of our areas, both in the U.S., in EMEA and in APAC. So positive momentum, I would say, still a bit lumpy, and we are expecting fluctuation between the quarters. A lot of focus now going into the third quarter to really progress our position in the U.S. as that is working towards the end of its budget year. So a lot of exciting opportunities. And I would say, given the discussions that we've had during the second quarter with all our customers and potential new customers, there's a lot in the pipeline. So positive from that perspective. Looking a little bit wider then on our Resilience and Expert Services. As we've previously communicated, our Resilience software business is focusing in on our existing customers in our core market. We have now executed the cost program, and that is in effect from Q2 and onwards. We are still targeting a positive cash flow for our Resilience software business for 2026. As I mentioned previously, the historic revenue recognition models means that we may still see from a P&L perspective that it is trailing a little bit, but that's going to pick up as well. And we have had a positive ongoing implementation within our sort of newer customers that were announced back end of last year and earlier this year, both within NATO and in European defense organizations where we are delivering our Resilience tools to help them become more resilient in the way that they operate. So tracking that closely, making sure that we invest the focus that we have left on Resilience in a structured and positive way, but really keeping a close eye on operating margins and making sure that we focus that segment into the best possible outcome. Third but not least, looking at Expert Services, it has had a stable development during the second quarter. We closed out at just around SEK 17 million of top line sales. And we are seeing a healthy demand within especially the total defense space, both here in the Nordics, but also growing in the U.K., which are our 2 prioritized markets for our Expert Services business. So that is developing well. We are looking at how we can increase sales during the second half of the year and really pushing ourselves out into the market because there is significant effort being put in place and we've also worked really hard to deliver on core projects during the quarter. One to just mention, there's an election year here in Sweden this year, and our consultants have been working really hard during the quarter, working with the election agency to make sure that we train them in preparation for the election so that they are more resilient and more resistant when it comes to influence activities and other things in preparation for the election. Just one example of how 4C Strategies is working with government and government organizations to help create a more resilient society in the world that we're living in today. So all in all, I would say that from a segment perspective and a sales perspective, we're still trailing a little bit in the second half, but obviously, a really strong end to the quarter with a major deal in the U.K., which you're going to see in the order book and the order intake, which Veronica is going to mention. But a lot of positive movement, still a lot of work to do, and we're pushing hard to continue to improve our position. So I'll hand over to Veronica for a bit of more details around the numbers. So...

Thank you, Jonas. So starting with the P&L. Net sales increased by 26% to SEK 95.4 million, as Jonas mentioned, compared to SEK 75.6 million last year. That was driven primarily by a stronger software revenue following the new customer agreement signed by the end of the quarter. As expected, the second quarter showed an improvement compared to Q1. Revenue development benefited from a strong performance in EMEA, while some expected business in the North America was again delayed due to timing effects. The improved revenue mix, together with the benefits from the organizational changes implemented last year that resulted in a significant improvement in the profitability. EBIT reached SEK 13.2 million, and that was corresponding to a margin of 14% compared with a minus 16% in the same quarter last year. If we look at the business mix, defense represented around 77% of the total revenue in the quarter, and that is reflecting both the strong demand that we have in the defense market and also our strategic focus in this segment.

Yes. No, absolutely. And I think if you just look at the 77% coming out of the defense, I think that's sort of where we will be expecting it to sort of be as we move forward. And we are seeing strong demand signals and working really hard into converting those as well. So positive movement on that side, but also reasonably strong in the other ones. So that's good.

Yes. If we turn to our financial position, we ended the quarter with a cash of SEK 1.2 million. During the quarter, we -- because of that, but also we announced a full secured rights issue of approximately SEK 54 million with an overallotment option of up to around SEK 20 million. The subscription period commenced today, and the rights issue is intended to strengthen our financial position and also ensure that we have the resources to execute on the strong order book that we have built, but also continue to invest in our defense sales capabilities. If we look at the contract assets, it increased by approximately SEK 33 million to SEK 318 million, and that is mainly reflecting the major customer agreement that we signed towards the end of the quarter. We also continued, of course, to convert contract assets into invoicing during the quarter, but it is worth noting that the increase would have been even larger without the updated assessment that we now do on the revenue and how we allocate across these contracts. And that is the result -- or it results in a more balanced buildup of the contract assets over the contract term. Going forward, our priority remains to be a disciplined execution and convert our growing order book and contract assets into revenue and also, of course, invoicing and make sure that we ultimately stronger cash or make it stronger cash generation.