Micro Systemation AB (publ) (MSABB) Earnings Call Transcript & Summary

Good morning. I hope you can all hear us. It would be great if you could give us a thumbs up in the chat. So we know the sound is okay. So welcome to this presentation of the year-end report for 2024. And I would like to hand over to our CEO, Peter Gille.

Thank you, Kim. So let's go into the Q4 report for '24. So it was a stable Q4, and we had a positive organic growth in several geographic regions. like Eastern Europe and some countries in APAC and so forth. If you look on the full year, the net sales for the full year was a little bit lower than last year. That is mostly related to accrual effects that we had. If you look on how much we actually sold in terms of bill sales or invoice sales, was actually in line with 2023, which means that we actually -- we had a bad Q2, but we really could at least get the sales back in the last 2 quarters. However, we're not happy with the full year sales, but it's in line. We have quite good gross margin and that is effect of our reduced share of hardware and that we have a strategy to reduce the hardware in the product mix this year, it's really, really good. We also have lower operating expenses, which shows up then in a better EBIT than last year. Next slide. So what we've done in 2024, is really to put the foundation in place for a stronger MSAB in the coming years. We have a new management team in place. We also have worked a lot with the strategy and updated that, and we are -- have done several investments in our products. Those small ones to improve the products, but also big ones as our new product that's coming out, which is UNIFY and we will continue to increase the investments in our product portfolio during 2025. The focus in the company is really to work hard with what we can control, which is the overall costs and invest in product development and R&D to increase the product portfolio. And that's what we will continue to do also in 2025. So let's go over to the numbers. I leave the word to Tony.

Thank you, Peter. So looking at the quarter, the quarter showed, although marginally a record high turnover in the company's history. However, the expectation as Peter mentioned were higher than the outcome with larger projects pushed forward in time. The projects are not lost, but have been pushed forward to mid or second half 2025. As a result of the delayed products, we see a lower sales -- new sales in the quarter compared with previous year, but these are timing effects between the quarters between new sales and renewals. Of course, when looking at the full year numbers, we see the distribution is in parity with previous year. That said, close to 50-50. Split by regions, we see a growth in APAC and a small decline in Americas, which is Spain by the projects pushed ahead, while EMEA is on par in the quarter. Focus on software sales resulted in record high gross margins in the quarters since we actively do not sell hardware components that are not part of our products offered anymore. Total OpEx is on good level compared with previous year. And when comparing OpEx towards previous year, we do also see some -- we have to take into consider some restructuring costs taken in Q4 last year. We have not seen that in this quarter. The amount was SEK 16 million in restructuring costs last year, while it was a positive reversal of SEK 2 million this quarter. The restructuring change of skills plans that was initiated in the first half year of this year 2024, has resulted in fewer employees compared with previous year, which is partly offset and covered by temporary consultants. So going to the full year 2024. Total sales for the year were SEK 405 million, while invoice sales amounted to SEK 413 million. That is to be compared with invoice sales previous year of SEK 414 million. Accrual effects driven by the way we recognize revenues resulted in a negative accrual effect of SEK 11 million between the 2 years. The main reason for that was a high Q2 sales previous year, which weren't met in this year 2024. APAC reported sales growth of 35% compared to previous year, and that was mainly driven by increase in private sector sales in India and Malaysia. EMEA, which accounted for 54% of the total sales recorded a sales decrease of 9% compared with the previous year. That increase was partly due to the postponement of several large deals. Americas was flat versus last year due to a number of deals that were pushed forward, as I mentioned before. Full year gross margin was 94%, to compare with 90%. On next slide, I will come back to the company's gross margin development for the past 3 years. Temporary staff vacancies have resulted in lower staff costs. These vacancies were partly covered by consultants, as I mentioned, which increased other external costs. Replacement of consultants were possible while permanent staff is planned in 2025. Personnel-related restructuring costs for the full year amounted to SEK 15 million to be compared with SEK 16 million previous year. But on the other hand, one-off net debt this year was SEK 14 million to be compared with SEK 26 million previous year. And those numbers also include write-downs, other one-offs and a cleanup of the balance sheet. So going into 2025, we have a really good and stable balance sheet. Earnings per share amounted SEK 2.03, which is a 25% decrease from -- increase from previous year. So let's have a look at the gross margin development for the past 3 years. We have a focus on our cost and margins, which has resulted in significant improvement of our gross margin when looking back. We have cleaned up our product catalog, and that has contributed to margin improvement as well as we have had focus on our core business of selling software. The cleanup was done in conjunction with the implementation of our new ERP system, which went live in April 2024 according to plans. The category new sales normally drive higher margins -- marginally drive higher COGS since a new sale normally includes 1 or more hardware components while license renewal only consists of software and therefore, does not drive any COGS. In our business model, an improved gross margin is a direct contribution to EBIT since the margin improvement passes right through OpEx and contribute to EBIT. Since a number of large projects has been pushed forward, we expect an increased share of new sales in 2025, which will also drive slightly higher COGS. We expect the COGS to be at the level of approximately 92% in 2025. So let's have a look at the balance sheet. The balance sheet, as I mentioned, remains strong with a stable financial platform for growth. We consciously review our product offering and capabilities. And as a result of that, an exploit was purchased externally during the year, and that is capitalized as an intangible asset. Internal R&D is still recognized as an expense in the profit loss while external purchases of exploits are capitalized. We closed the cash position at SEK 138 million. The difference in working capital improvements between the years 2024 and 2023, are primarily due to an improvement accounts receivable collecting process, which resulted in a one-off effect during the improvements, and that was mainly done last year 2023. The implementation of the new cash collecting process has been successful and resulted in improved day sales outstanding, also known as the DSO KPI measure and we can see a table up in the right corner, we see the improvement in the number of average days, day sales outstanding in those years. So we see average days and sales outstanding in this year, 2024 was 43 days and that is to be compared with how it looked 2022, it was 78 days.

Good. So market dynamics, please, next slide. So we have -- as said, we have a positive organic growth in several of the geographic regions. In Eastern Europe, we have had significant progress this year, and we also see that we will continue to have that in '25. But also in Asia, we had a big project in India, and we also see a lot of interest in our solution within the APAC area, within Australia, for instance, for the Frontline solutions and so forth. We also see there is an increased engagement by some of the federal authorities in the public sector in the U.S. and we do believe that we will have some good progress there in the coming year. As said also the sales in Eastern Europe exceeded our expectations, but we also expect that to keep growing that. But in EMEA, we have not had the revenue outcome that we were hoping for or planning for. It is due to a number of projects that has been delayed none of them has been lost, but they have been delayed or not coming live at the time. And we'll see that in the later half of 2025, we should see some of these projects being materialized in terms of revenues for ourselves. So we see positive on EMEA in 2025, but we have some significant revenue disappointments during '24 in EMEA due to these projects. Now coming to the thing in the company that I'm most satisfied with is really our development of the products and the product features. We are launching our new products, UNIFY Collaborate, which is really an interesting tool to work within the market, it would be a tool for gathering data and being able to share data among different sources within an organization. But we're also doing a lot of work with our premium extraction tool, the XRY, where we will launch a number of new features, and we have launched them also during 2024. We see this as really being the best tool in the market right now just need to get to customers to understand that and buy more of it as well. And it's always a time after releasing our new features or product to get communicated to customers and get the revenues coming and we will continue to invest in that product also during 2025. And also, we are now launching the new generation of Frontline solutions with the MK4 which we know that some existing customers already have decided to go into that solution. And we will continue to work with improving the product portfolio during 2025. This is really a focus from us. And I have to say that I see a lot of progress in how to get things faster to the market at good quality. We also bring in new competencies within the R&D department and in the product. We have a new product director, Tomas Taesler being hired. But we also have some new talent that we also will continue to recruit in -- now in 2025 to increase the strength in our product development department. So in summary, we are really following the line of strategy that I communicated after the Q2 report. We continue to invest in our products and making MSAB a stronger company and also creating a financial platform within the company that really will enable us to scale when we increase the revenues going forward. We are at -- we will show the market that we really are a scalable company. And we will continue to both improve but also to do targeted investments into new products to increase the market share for us going forward. But to make the market understand that we also need to focus more on our brand awareness and how we go to the market, how we communicate this to the market. Next year, we are participating in the biggest fair in our industry in Wilmington, and we will be 1 of the platinum sponsors in that event, and that's the difference how we go to the market now. We are investing more in marketing and communication around our products. And we're also trying to work much tighter with our customers in workshops, seminars to really getting them to understand the benefits we have in our new product portfolio that we are creating. That's it. Now let's open for question and answers.

So if you have any questions, feel free to put them into the chat. Okay. So we have 1 question here then. Large orders. You have previously been speaking about large military orders in Q4 2024. Were those orders realized and booked as sales in Q4 or slipping into 2025? Can you take that 1 first?

Yes. So we have 1 big order in Q4 that was related to that, but we also expect more big orders in that sector during 2025.

And could you also say something about those delayed in EMEA if you expect them to be realized in 2025?

Yes, we expect them to be realized in 2025. They are -- some of them are related to Frontline projects which is -- didn't happen in '24 due to a number of reasons, can be anything from slow moving customers to legal requirements and so forth or government requirements even. So we are looking forward to see some of them realized in '25.

And then we had a comment on gross margin. Impressive gross margins in Q4 as well as for the whole of the year. Is it fair to assume this new higher level versus historical is around 80%, 80% to 90% since MSAB is selling less hardware?

I can take that one. Yes, we will continue to focus on a higher gross margin. And as Tony mentioned, we are aiming to be at around 92% for 2025. Since we will have some Frontline projects, which contains a piece of hardware. But we are not getting in hardware business anymore. So we expect it to be above 90%.

And then a question on OpEx. OpEx unchanged year-to-year and number of employees was minus 14% year-on-year. Can you elaborate that -- on that and OpEx growth for 2025?

Yes, we will grow OpEx in 2025 on a marginal level, and that is due to that we want to invest more into the R&D department. That said, also some of the people in the R&D department today are consultants. So that cost will also be reduced. So we are planning to increase personnel expenses. We are planning to decrease the consulting cost. But overall, I would say, we will see an increase in R&D expenditure next year, but within a controlled level.

And then we have a question about the military spending that this is increasing. How much of MSAB's sales is related to the military? And are you seeing any effects of increased investments from there?

I would say we don't see an increase this year for '24, but we -- hopefully, we will see an increase in '25, '26.

And then market consolidation appears to be a trend in the digital forensics industry. What's your opinion about M&A growth versus organic for MSAB?

I think M&A growth is definitely interesting. But before doing the M&A, we need to get MSAB in a better shape and start creating organic growth on our own. But then it's a natural step to go into M&A after that. And in my previous companies, I've always done the number of M&As. So that's absolutely something that I want to do. And there are definitely opportunities in the market and a number of companies that wanted to have discussions with us because they want to join forces. So there are opportunities. But first, we need to start performing ourselves.

And then a specific question about targeted investments. Does this relate to iOS? Can you quantify them?

I would rather not answer that question before we release the new functionality that we will release in '25.

And then the last question we have for the moment then is regarding intangible assets in the balance sheet, increased slightly quarter-on-quarter for Q4. Have you started capitalizing investments?

Yes. So we are capitalizing, as Tony said, the exports that we are buying externally because -- but we don't capitalize our development efforts, our own internal development efforts. I think that we will keep as that at least for now but it feels natural when you're buying something that will be a part of a new functionality or a new part of the product is really an investment that should be capitalized. And that is the strategy we have. Do you want to comment on that?

No, just same as you.

So that appears to be all of the questions. We've answered all of your questions here. So I guess if there aren't any more, then we'd like to thank you very much for participating in the call. Thank you very much.

Thank you. Have a good day.