4C Group (Stockholm:4C) Q3 2026 Earnings Call

0:00 Q3 presentation from 4C Strategies. My name is Jonas Johnson. I'm the CEO here at 4C and I'm joined here today by Veronica Wallin.

0:08 Good morning, everyone.

0:10 And we are going to guide you through this morning's presentation after we release the figures in the Q3 report this morning. So we will jump into the presentation. Whilst we go through the presentation, it will take us about 20 minutes or so. Today we are opening the question session in the chat. So if you have any questions, please write those as we go through and we will come to a Q&A session at the end of the presentation. So if we just look at Q3 as a whole, we can see that it's a continued transition quarter for us here at 4C. We've been working hard with how we continue to evolve the company, focus in more on defense, streamline our software development and reprioritize our efforts. And I think we've come a long way and we've made good progress on that.

1:07 We have signed a number of key extension to some of our core customers around the world from Canada, through the UK, here in the Nordic markets, and also extending our long term relationship with our customers in Australia. which is really important in terms of solidifying our base for the future, but also goes to show that the customers where we are engaged with them from a long time and where we're working together, they continue to see the added value of using our products in the ramp up that is now ongoing. As I mentioned, we are continuing the transition, which we announced back in the last year. We're currently seeing that the OPEX level are at the right level. That doesn't necessarily mean that all of our investments are in the right place. So we are continuing that work to make sure that we are focusing our efforts as best we can. But if you look at OPEX at the levels it is right now, that's sort of We're expecting it to continue.

2:10 Good progress on that during the quarter. Also, I mentioned it briefly already, but very strong progress when it comes to how we build our software and how we're working with our customers to enhance the way that we can deliver our products out to the end users. All in all, if you look at the third quarter, we had a bit of a slowdown in the US and North America. So not the progress that we were pushing for and expecting there as part of the end of their budget year. But at the same time, some key core extensions in the rest of the world, which I will come back to as well. So. Jumping into the numbers a bit more in detail. So as you would have seen, top line at 67.3, a slight reduction compared to last year. Q3 is not our strongest quarter in the year and it varies quite a lot depending on what happens in North America as we have a significant slowdown over the summer periods here in Europe.

3:14 We see we have a negative EBIT of 6.1, which is an improvement compared to last year, but obviously still below what we're targeting. I mentioned OPEX. Our cost base is down approximately 13 million or reduced by 13 million compared to the same quarter last year, which is obviously a very positive improvement. Move, given that we continue to deliver and we haven't really reduced our ambition levels anywhere. So we've done optimizations and and reduced and refocused cost. You can see on the bottom right hand corner as well the way and Veronica will come back to this as well a little bit later. The way we changed in terms of how we build and deliver our software to our customers results in lower capitalization and higher amortization at the same time. This is a positive from a Slightly longer term perspective in terms of how we see the visibility in the company and how we run things. Obviously, it has a short term impact on the P&L and also then looking at that in correlation with what we announced during the first quarter of the year, which is Due to the fact that we've changed how we build and deliver software, we're also looking at how we recognize revenue from our software, which is also impacted or continues to impact our quarters from a comparison perspective in the short term.

4:47 But we are building a stronger, more solid base for the future. And looking at that as a positive, albeit it does have impacts on the short term. And we'll come back to the numbers in more detail during Veronica's presentation a little bit later, and obviously also going into the cash flow and the developments in that area. If we look at the sort of the more of the business side of what's actually happened during the quarter. So as I mentioned, we had a slower quarter than we were expecting in defense, but we did have some strong proof points from our existing customers. We had defense net sales of 47 million. which is approximately 70% of the group sales.

5:34 We did have good extensions and expansions with our current customers up in Canada. They have also now, as one of our first customers, started to implement the use of AI within the actual use in the software. And I'll come back to that at the back end of the presentation a little bit. I mentioned also we had the core contract extended for another three years in Australia, delivering to the combat training center down in Australia and enhancing their readiness. A customer we've been working with for a really long time and obviously a positive that they continue to put their trust in our ability to deliver the software that they need to enhance their ways of working. We have expanded contracts in exercise planning within NATO, a growing area where we see quite a lot in the pipeline and are expecting more things to come in during the fourth quarter as well.

6:32 It is an exciting opportunity to continue to build with NATO. We've had a strong relationship with them for a long time, but it has been enhanced, I would say, by Sweden joining NATO as well. So we're seeing more positives coming out of that. in addition to working with it from the UK. And we have extended some of our really long-term running contracts outside of the ones that we've announced earlier this year in the United Kingdom as well, supporting some of their higher levels of training and also building some bridging contracts on some programs which are due to be extended and expanded during next year. So even though it's a slower quarter than we were expecting in defense, there's a lot of positives that have happened. And also, we've spent a significant amount of time continuing to expand on our pipeline and build opportunities for the future and working with our customers predominantly here in Europe in terms of moving the opportunities forward.

7:35 If we look at the North American market and predominantly then the US, We had challenges in terms of converting the sales efforts, which we were hoping for as part of the end of their budget year. Funds were reallocated out from training and into more of the operational field in the US. What we have done is we've solidified our base there in terms of delivering on our core programs, as you would have seen in press releases after the end of the quarter as well. We're now in a position where we have a strong base to build from in the US. So we're going to focus on delivering within those programs, retaining our position in the market and also continuing to inform about what we offer and where we are.

8:24 and to work on the existing pipeline, but to use really the position that we've built, which is a strong position for the next 12 months, to make sure that we can be both revenue and cash positive out of the US in a significantly more positive way than we have been if we look at the last 12 months, for example. AB Group AB Group AB Group AB Group We will see what the fallout comes from that in terms of continuing resolutions or budgets or how the US government is focusing their efforts as we move forward.

9:16 Final point when it comes to defense, the European defense market is still growing in a really exciting way and we have been working that for a long time as I'm sure you're all aware in terms of positioning ourselves and using our accreditations, frameworks and and connections together with our customers to really inform them that when they now get to the point of actually trying to convert all these investments, which I have done over the past few years into actual capability, we're here to help. And we are seeing a significantly increased demand and are expecting a lot of conversions to happen over the next quarter and into early next year.

10:07 Moving on from defense then into the resilience and expert services side of the house. As you're aware from last year, we are working resilience right now in a way that we are looking after our core customers. We are retaining that base. We improved profitability and increased net sales compared to last year. And we're still on track to make sure that resilience is a cash flow positive contributor into 4C compared to where it was a year ago when it was more of an investment. So we have done that transition. We're working closely together with the teams in resilience and in our engineering teams to make sure that we continue to enhance the way we deliver the software and looking after our existing customers.

10:54 On the expert services side of the house, we had a strong quarter, albeit the third quarter, given that a lot of our efforts are focused here in the Nordics. The third quarter is traditionally weaker than the other quarters, but despite that, we had a strong quarter with good growth. And we delivered a broad range of services, which is also the reason why I think we see such an uptake in expert services and a continued growth and are expecting that continued growth. So we are delivering support from the financial sector with customers, as I mentioned here on like Euroclear, all the way across to assisting municipalities in their ways of dealing with major events, such as school shootings and other tragic incidents that may happen in the municipalities.

11:45 So working with a broad range of services, all tied into the same sort of sector and area. And we are seeing a continued expanding interest also in the terms of the total defense services and a lot of organizations coming into the realization that they need to work more actively with these questions and how they are going to be a part of a more integrated total defense concept within the society. So we're working that actively in Sweden right now. We are expecting it to continue to grow into our other markets in the Nordics and in the UK and obviously treating the growth in expert service as something really positive and it continues to give us that stable foundation over some of the fluctuations that we can see in other parts of the business.

12:36 All in all, a lot of positive things during the quarter, even though they may not have trickled all the way through. But a lot of positive building blocks that are coming into place. And we're looking forward into the next quarters to continue to build on all of these three areas. So I'll come back to a little bit more of a future outlook at the back end, but I'll hand over to Veronica first for a bit of more details into the financials and the KPIs.

13:08 Thank you, Jonas. So if we start with the net sales, the third quarter came in below our expectations, as Jonas mentioned. Sales declined by 7% year-on-year to 6%. 67.3 million compared to 72.7 million in the same quarter last year. Despite the lower revenue, Abbott improved to minus 6.1 million compared with minus 11.7 million last year. This corresponds to an EBIT margin of minus 9% compared to minus 16% last year. The improvements reflect the lower cost base following the organizational changes initiated, as Jonas mentioned, last year during the Q3 quarter.

13:53 As Jonas also mentioned, the changes to how we develop X and out also affect our reported results, both that we now expense more of the development costs as incurred, while amortization is higher. Together with a lower initial revenue, this affects EBIT in the short term.

14:16 Yeah, I think that's a valid point. And as you can see, the fluctuations between the quarters continue to affect us. We are expecting a stronger Q4 this year and ending the year on a high. But yeah, it does go up and down. And as Veronica mentioned, the combination of the amortization and capitalization and also then how we look at This revenue, when we deliver it to our customer, impacts the bottom line quite significantly in an individual quarter. But from a long-term perspective, it gives us a higher visibility and is more positively

14:55 Yes, turning to our financial position, we ended the quarter with approximately 8.6 million of total available liquidity, including the overdraft facility is 16.4 million. The right issue completed during the quarter and is drenched in our financial position enabled us to repay loans. As a result of that, you can see there's a net debt decreased to 124.1 million from 170.6 million at the end of Q2. Contract assets increased to 342 million and we continue to work on bringing revenue recognition and invoicing more closely into alignment.

15:37 Yeah, and we've talked a lot about this over the past quarters. We are working on it and we will see a stabilization and then a reduction here. Tying up these long contracts is good for us from a perspective of that we're looking in the customers. Obviously, we need to now work really hard and actively to make sure that we continue to increase the way that we can invoice up front and try to move our customers into into that space as well. So working at a lot of different angles on this area.

16:13 Looking at the order intake and the order book, order intake was 56 million in the third quarter compared to 60 million in the same quarter last year. At the end of September, our order book stood at 947 million, an increase of 236% compared with the same period last year. This was slightly below the 960 million reported at the end of Q2, as the revenue recognized during the quarter exceeded new order intake. The order book provides a strong base for future revenue, but quarterly revenue depends on delivery timing and also how the contract is structured.

16:51 And I think you can see that here the fluctuations between order intake in the different quarters as well, depending on when contracts are signed. And as I've mentioned in the past as well, our ability to impact exact timing on contract signature is quite limited. But obviously, the fact that we're continuing to build an order book and that we have a strong position for the future is something that's really positive, as most of this is ready to be delivered. From our perspective, it's just a matter of timing and getting into the position of delivering that to the customer. So I think also, obviously, a big focus is in terms of cash flow and And as Veronica mentioned, we have reduced our net debt quite significantly during the quarter.

17:38 We did, as everybody's aware, share issue and raising capital during Q3, Q2, Q3. And we are looking at an improvement for the cash flow for the coming quarters. And we are expecting a more positive development during both the fourth quarter and then into next year. We know that Q3 is a weak quarter when it comes to cash generation due to not having any of the big license annual payments and so on coming in in that specific quarter alongside the fact that it is a slower quarter on deliveries in Europe.

18:23 But we are expecting that to pick up during the fourth quarter. So we are seeing a positive trend and a positive outlook when it comes to our organic cash flow generation for the coming quarters. And I think that's important to mention as well, given Given the outlooks that we've been showing here today. So if we then look forward into where we are, and I'll cover this off in two different segments or two different areas, really. I mentioned it briefly, but I think it's important to talk about where we are as a company when it comes to how we deliver our software, which is our core product and the area that we are seeing the biggest growth potential in, obviously. So When it comes to how we deliver it, we have gone into a continuous delivery model, which means that we've shifted from delivering twice per year into something around 50 releases per year in the different products that we have.

19:24 We are really integrating AI into how we build the software. So using it as part of helping us with building models and conceptual designs and showing that to the customers at a really early stage to make sure that we focus our efforts in the right area. That gives us a significantly higher pace when it comes to delivering the best possible products out to our customers. And we're doing that with the same size organization or even a smaller organization than what we used to do. So we have the We have the right size. We're continuing to look for additional capabilities in terms of shifting some roles around, but we are heavily integrating AI into how we build. And when it comes to how we build, that's not just around actually producing the software. It's a lot around how do we test it, how do we make sure that it is creditable and that we can run it in the sensitive systems and networks where our customers live and work.

20:28 So really exciting development there. I think the fact that we can build in the pace that we're now building is something completely different and it is going to give us a really good push for the future. We also, as I mentioned briefly, integrate AI into what we deliver to our customers so that they can actually start using it. We're building a lot of capabilities today that are ready for our customers. There is still some challenges when it comes to the types of organizations that we're working with in terms of how they are able to use AI tools and large language models within their own organizations, but we're rolling this out and we are We're making it ready for the customers just as soon as they are ready to start using it, either in an integrated system or as a standalone edge AI solution for their own use.

21:23 And then finally, as been mentioned a couple of times, we see a lower capitalization as a result of this as well. which allows us to have a greater visibility for the future. It gives a clearer picture about where we are. And all in all, I would say that this is one of the biggest changes that we've gone through as a company for a really long time in terms of how we are now able to deliver our products out to our end customers. And we're seeing that effect as well in terms of increased usage, increased interest, and a change in behavior from our customers as well. And then looking into the future, well, the focus hasn't necessarily changed all that much from Q2 or Q1 this year. We are really focusing in on defense, making sure that we can capitalize on the development that we're seeing and the increased market interest that we're seeing. It does take time.

22:21 So we're adding resources in terms of being able to go broader into the European defense market. We're adding capacity when it comes to reaching more customers and showcasing what we can do. We have our current cost base adjusted to a level where I think is the right level. That doesn't mean that we will stop that work. So we're continuing to look at making sure that we have a strong cost discipline and really working on the cash conversion as well to improve our free cash flow and our cash position. We are expecting to be able to operate within our means over the next foreseeable future. So We're working hard on making sure that that's the way that we can convert our current contract assets and and continue to work with our customers to improve our cash position.

23:21 And then finally, continue to push the product innovation because it is a big rise in interest and in opportunity in the market. But that said, there is also a lot of new solutions which are coming into the space, which I think is really exciting. And I welcome the competition from Good Ideas. but it does mean that we need to continue to stay on our toes and to continue to push to make sure that we're actually understanding what the customer needs. We're working at the point of need with the end users, if that's a soldier or an instructor or a commander or an exercise planner, and really making sure that we deliver value to our customers in this critical time in the world. So keeping the focus on defense, making sure that expert services continue to grow, safeguarding our resilience customer and really optimizing on the pipeline of opportunities that we see around the world.

24:21 There is a lot of positive that is coming our way and a lot of great opportunities to end the year on a significantly improved position. And then that takes us into a solid position for 2027. So with that, we will shift over into a Q&A session. So we've got some questions coming in here. Let's see. Okay, just a second. So first question here, looking at North America going forward, do you anticipate things to ease now in Q4? Should we expect further delays? Well, I think for us, North America or US, as we should say, because the Canadian market is going really well for us, we're expanding our position in Canada and we're continuing to see increased interest for them for Q4 as well.

25:17 But if we look at the US, well, I mean, as I said, there's a midterm election starting in a few hours. The outcome from that, we will see what happens. I believe that there is still a market for us which is significant, and I believe a lot in the US market from a long-term perspective. What we have now is a much more solid base to build for the future. If we look at the next 12 months, we're in a position where we will be significantly both cash and revenue positive coming out of the existing programs. So one big focus is to make sure that we deliver on those in terms of our ongoing development programs and integrating into some of those US systems. And in the meantime as well, using that position to continue to push into the new markets that we see. And we're broadening that a little bit outside of Army because we have seen challenges in just Army.

26:16 So we're looking at other areas as well in the Special Forces markets where we've had success in other parts of the world, further into the joint space and other areas of the USDOW. So there is a lot of opportunities. Will it ease during Q4? remains to be seen, but just from a runoff perspective, we are expecting a significant uptake in both revenue and cash that has already started now during October. Okay. Shift in geographical focus. How much less resources is directed towards U.S.? Well, we're limiting our investments a little bit when it comes to the U.S.

27:02 in looking at sort of Broad Space Business Development. That is being refocused into Europe and the UK and also growing a little bit in APAC. I'm not going to go into exact numbers, but we're talking about reallocation of resources. Where do we put our focus? Where do we invest in trade shows and so on for the next 12 months? So a shift in terms of focus more towards Europe. Okay. Given there is no volume component in the business model, why does less training during the summer have a negative effect? Well, so it doesn't necessarily from a software revenue perspective, but it does from a support. So software delivery, our SRS, so software related services, which is our manpower support that we append to some of our military delivery specifically in the UK.

28:12 and in that area when exercises are shifted or cancelled that can have an impact which can be seen as part of a quarterly result as well so when they slow down over summer and then in addition to that also shift exercises into later in the year it has an impact on where we are okay Okay. Have you done your last rights issue? Maybe take more loans in the future if necessary.

28:58 Well, as I said, we are expecting an improvement in our cash conversion and our organic cash flow over the next quarters. We have good visibility when it comes to Q4 and reasonable visibility when it comes to H1 of 27. We are working with all different options in terms of... if there is a requirement for refinancing and long-term loans and so on. And we see some opportunities there as well. So I would say that we have a good outlook towards the future and are not working towards another rights issue in the near future and have other ways of handling that. But also, and I think this is important, for the last 12 months, we've gone through quite a significant reorganization Restructure of the company. We've reduced our costs a lot and we can see that in Q3 as well. And given that base, we are now seeing, and as I mentioned as well, with a significantly higher run rate in the US, which has been a bit of a drain on the rest of the organization over the last 12 months.

30:10 We will see a significantly more positive development when it comes to our operating levels and that cash flow as we move forward. That had not yet come into effect into Q3. But if we look at the rolling 12 months into the future, we can see we're in a stronger position and we are expecting that to be able to carry itself without any additional requirements. We're getting a number of different questions about coming contracts here and size of those contracts as well. And I would say that the size of the contract mainly depends on the duration of for how long we can get the customers to commit.

31:07 Now, that's normally if it's a new customer, it's normally, I would say, three years, sometimes ranging into five. and then obviously depending on that that depends on the size of the contract if you look at the ACTS so the UK Army contract which we signed back in Q2 obviously that's a significant size in that contract but in a lot of areas that's driven by the length of the contract as well so it's unusual for us to sign contracts that range for 15 years We are seeing a number of different deals in the pipeline, which are late stage, that we're working really closely with our customers right now to make sure that we can close out. which are at the sort of the same per annum levels which obviously short term is what's important right so looking at a number of different deals around Europe that will be able to grow we also see some really exciting NATO opportunities coming up so there is a lot of of things and opportunities that are late stage that we are working and that we have been working for quite a while. There was another question in here about when we will see the bottlenecks around procurement easing.

32:27 And I think I talk for a lot of defense companies when I say that we're hoping that that will happen very soon, especially in Europe. But there are still challenges. And I think maybe the final question here is, We're looking, can you talk a little bit about potential for new modules within Exxon and how large is the market and how large is the pipeline in a shorter perspective, any low-hanging fruits? It's a really good question and I'm glad you asked it because it's an area that we haven't really covered in this quarterly report, but it is a really exciting area. So we're currently launching two new modules within our sort of five product suite of Exonaut products. So broadening our scope a little bit from the traditional large scale exercising to into both individual training where we see a lot of opportunities ranging from special forces all the way to territorial armies, Home Guards, National Guard and really helping to improve instructors on that lower level of training and how do we if we're going to ramp up quickly to significantly increase numbers across these armies in both Europe and other places how are we able to do that and our new solutions on individual training is gaining a lot of traction when it comes to helping organizations to do this. It is early stage.

33:54 We are currently doing field testing with some special forces teams around the world, which has come back really, really good. And based on that and a lot of interactions that we are currently having and have planned for the remainder of the year, I think we'll see some really exciting wins in that space. The other area which is also showing a lot of potential is in terms of products that help in test and evaluation. So looking at the market in terms of how do we build counter drone systems, counter UAS systems, for example, is a really big area that is exploding in military warfare at the moment.

34:39 but actually looking at how do you run these tests and how do you make sure that the money that you're spending is spent on the right things and how do you document all of these things. So we've been working with NATO for the past year to develop a solution which has put to the test in the Baltic states over the past two weeks with great results in terms of data collection and being able to give them a clearer picture. So that's also an area where I think we'll see an uptake in terms of our ability. And I think it's also a really good time for us to broaden our product portfolio outside of the larger collective training space, which still represents above, well, I would probably say about 60% of our defense revenues coming from that same product and still growing. But in addition to that, being able to break into the lower lower levels of training, individual training, unit training, we will see a significant opportunity for that as we move into the future as well.

35:46 And I think we will We'll stop there, Veronica. And thank you, everyone, for your interest today. Thanks for joining. And I hope we've covered off, if not in detail, all the exact questions, then at least the overview. So thank you very much. I look forward to sharing more news as we progress through the fourth quarter of the year. And thank you for your interest in following 4C strategies.