My name is Espen Gylvik, and with me, I have the company's new CFO, Lars Hjarrand. Welcome to you as well. Today's agenda is to go through some of the highlights of the second quarter, a bit on the business review, financial review, try to paint some sort of view on the outlook, and then at the end, as we always do, open up for questions. Let's kick it off. I would like to start by saying, I think second quarter is a mixed quarter overall for us as a company. I think the underlying business runs quite well, and the pipeline is growing faster than it did in Q1, and most of 2025. The order intake grew 2% year-over-year and 27% up from Q1, despite that there is still influence from the geopolitical uncertainty in the market.
Not necessarily in a sense that we are losing deals, but some of the larger investments and deals, especially inside energy verticals and defense, seems to take a bit longer from deciding to sign POs and not at least from POs to start delivery and recognize the revenue. I think Lars will come back to that in a bit of a minute. If I look at the financial highlights, the order intake, we said NOK 126.2 million. The underlying business across that runs okay. Very pleased to see that Middle East, that was significantly impacted in Q1, where they did around 16% of their internal target, was back on track, deliver on budget or slightly above their own budget for the second quarter. Seems like things have normalized a bit more. We talk about 5x or 4x versus Q1.
Europe is slower than what we expected, i t's largely driven by two significant defense deals that was moved from the second quarter into Q3 and Q4. U.S., somewhat below their internal expectation at NOK 32 million, impacted of one large customer we signed last year, for their extension of that agreement from the second quarter into the last part of 2026. Revenue, one of those areas where we are definitely not happy, NOK 83.7 million. It's - 35% year-over-year and also 22% below Q1. It reflects a couple of important things.
The order intake in Q1 was way below expectation, and that carries over to the revenue impact in Q2. The majority of things we signed in previous quarters are based to be revenue in the following quarter. Also two deliveries with defense, out of Central Europe, that was moved to the latter part of Q3 and early Q4.
One of the really positive things, and it's important to emphasize, we have talked about the pivoting we are trying to do as a company, moving more and more over to subscription and software revenue, and build a much larger and more predictable revenue stream as a company. The ARR grew from NOK 66 million to NOK 76.8 million from Q1 to Q2. We are quite happy with that. We see that that trend is continuing into Q3. We do expect to reach close to our initial target for the year at the end of Q4, and very much in line with what we also communicated regarding our journey towards NOK 250 million in ARR at 2030. Quite high gross margin. Very pleased to see that we, in a relatively weak revenue quarter, are able to maintain a relatively solid, good gross margin on what we sell.
It also reflects largely the fact that software subscription and partner sale is a key element of the sale inside the quarter, hence also much higher margin than the average margin we normally run with. It also mirrors the fact that some of the larger turnkey complete projects that was expected in Q2 that slipped into Q3 and Q4, had an impact in a positive way on the gross margin. OpEx continues to gradually go down. We have initiated a process, Lars will talk more about that later, to really get a sustainable OpEx base that is balanced and predictable versus the type of revenue performance we have as a company. EBITDA is good or bad, a reflection of a relatively weak revenue quarter at NOK -14.5 million.
If we look at some of the highlights in the quarter, we are starting to take a very strong, significant position in certain parts of Europe when it comes to defense. So three new defense projects in Europe, including a service agreement, which is a recurring element. The pipeline across defense in those markets are increasing significantly and quite fast. I will talk more about defense and partners a little later. Really happy to see that we have now started to go beyond Microsoft Innovation Centers and Envisioning Theatres. We signed our first GSOC, which one of those critical solution rooms for Microsoft. We do expect that that's a new area for continuous growth with Microsoft as a client, beyond all the upgrades that is happening on the Innovation Centers. On the Cyviz Core Technology partner side, we added three new partners in the quarter.
We are now at 28, and we have said very clearly the future growth will have to come through a partner ecosystem. V ery pleased to have three new, and it's not necessarily the 28 that is important, it is the quality of the partners we have and type of distribution around those regions we work in that is important. The Cyviz Software Platform, an essential part of the future of the company that was launched in April this year. After Q1, we had ballpark of 32 partners. I'm pleased to see now that during second quarter, the enthusiasm and interest in the global partner network has made us reach 70 active partners. That's going to be critical through second half and far into 2027 and beyond to really accelerating the software part of our business, because that is coming through that platform. Some of the more significant wins.
I said, in the beginning that happy to see that Middle East, at least from an investment point of view, seems to normalize more during second quarter. The key customers we have in Saudi continues to buy. The budget was approved for the remaining 2026 in July, t he projects are lined up for the rest of the year. But the large utility company in Saudi that has been one of our most significant global customers, continue to buy and modernize their control rooms and operation centers. The same with our trusted partner, as the key investment organization in Saudi continues, and happy to see that their budget also for second half is now approved. Of course, the defense vertical, which probably is and will continue to be the most significant growth vertical for our core type of turnkey business, continues to buy.
In U.S., KPMG with us and a software partner have delivered their sixth type of strategic solution. Also one of those larger global Fortune 500 customers continues to buy and upgrade their solution. They are also now investing in Innovation Centers in a similar way that Microsoft did. We are back, so sorry for that delay. Seems to be some sort of technical issue with the sound, we are back on track. Just want to do a quick view on the order intake. I think these are actual numbers. You can see here that Middle East in Q1 actually did NOK 13 million , which was, as I said, 16% of their internal budget, and they were back at 51 in Q2, so really pleased with that.
On the vertical side, you see energy and defense are the two verticals that carry the load of verticals. I think for the foreseeable future with defense taking over, those two would be the most important type of verticals for the company's growth going forward. The majority of order intake in the quarter still comes from existing customers. I say in my role, that's a good and a slightly less good element. It's good in a sense that it shows that the quality of the solutions we deliver continues to impress the customers, and the trust they have put on us is still there. But at the same time, we are also in a need of continue to broaden the customer logos and portfolio across our regions.
Hence, also the importance of continue to build a partner ecosystem, which is now way more significant and solid than it was a year ago. Then, at least for us, one of the most significant financial KPIs, based on our four-year plan, the journey towards NOK 250 million in ARR. Really pleased to see that it's growing. It's growing significantly, it grows with 59 point something percent from previous year, and it continues to grow also well from Q1. It's driven by Cyviz Software Platform that was launched in April this year. I think it's starting to pick up. It counts for 15%-20% of the ARR in the quarter. The remaining comes from existing business on the software side, the license side.
As I said, we have moved from 30 + partners after Q1 to 70 active partners by the end of Q2, and we now have continued discussions with additional 15 more partners in pipeline. I think the size of the partner ecosystem will be more than significant when we go out of 2026 and start heading into 2027 to continue the ARR journey. There are now eight end customers hosted in the Cyviz Cloud.
One small parameter just worth mention, a lot of the federal customers, including defense and those critical infrastructure companies, have also asked us if we can also convert our software-based cloud platform into a software-based on-prem platform, which is a project we have initiated, and we do expect to have that at least available for customers in the timeframe of November this year. That will also enhance the pool of opportunities for the software platform and the recurring growth going forward. Then I hand it over to you, Lars.
Thank you, Espen. Looking at the financials, and we will start with the revenues, and Espen has talked a little bit about it. We had a revenue of NOK 84 million in Q2. Obviously weaker than we had hoped, but it is the result of the relatively weak order intake in Q1 and delays on some projects. In addition to that, we have had some negative impact of both the new revenue recognition policy and also some currency effects. Further, the defense deals in Europe have taken longer than we have expected, and especially in addition to from decision to signing, but also from PO signed to converting to revenues. We see that, as Espen will get back to on the backlog, which has increased. Important also to note that no orders have been canceled. It is postponement that we are talking about.
Looking at the gross margin, we had a high gross margin of 65%, which in a large degree reflects the favorable product mix we had with the higher share of services and software. At the same time, a lower share of turnkey project where we also have third-party hardware often, which often then will lead to a lower gross margin on those projects per se. As you see also in the past, the gross margin will continue to vary quite significantly between quarters, but as we build up the ARR base and also the software platform, we do expect that the revenue slowly over time will increase. Looking on the cost side, we see that the operating expenses are slightly down from the previous quarters, and the reason for this is the prudency that we are exercising and pretty tight cost control.
We do focus on efficiencies and optimization and to adjust the cost base to reflect, number one, the weaker first half we have had, but also the business transformation that we are in the middle of as far as working towards more ARR and partner-driven business. It seems like the OpEx is not that much down, but the underlying cost base is about 8% - 10% down from the trend and is obviously partly offset by the inflation increases. If you look at the EBITDA of NOK -14.5 million, it is the direct result of the other P&L items, obviously, and especially the lower revenues for the quarter. We will also see going forward a fluctuation of EBITDA per se, but we do definitely anticipate significant improvements in the second half of the year.
If you look at some of the highlights of the balance sheet, the reduction in total assets that we see is mostly related to accounts receivable, which is then again based on or the result of timing differences per se. Interest-bearing debt, we have at NOK 84.2 million, where most of that is the overdraft facility that we have. The equity ratio was reduced to 21%, which is a decrease, and we have, as we said also in Q1, a covenant waiver granted through Q3 this year with the increased credit facility. We do have good dialogue with the bank, and we feel confident that what we see in the second half will get us through in a good way. Going on to cash flow, we have negative cash flow from operating activities, obviously mostly driven by the negative net result, but also changes in working capital and other accruals.
The changes in net working capital, which is positive, is mostly from the decrease in accounts receivable, and we see that we had quite significant changes to accruals and prepayments that had a negative effect on cash in the quarter. Cash flow from investing activities is CapEx, essentially, so related to R&D investments in product development and the ERP project. As far as cash flow from financing activities, it's almost all related to drawing on the overdraft facility. We ended the period with NOK 6.8 million in cash.
Okay, then it's my turn again. Just spend a couple of seconds on the backlog development, and I think this is quite important. As you can see, the order backlog is going out of the quarter NOK 402 million. I think it reflects at least a couple of important things. It would be less if the deals that was anticipated inside the fence and in the energy sector in the U.S. had been shipped and delivered, of course. Hence, the revenue would also be similarly higher. But it's a solid order backlog. These are money in the bank, signed contracts due to be delivered and converted into revenue. We definitely expect a significant portion of this to be converted into revenue during the second half of the year.
We are quite convinced with that, and the forecast we have on new order intake through Q3 and Q4 would make the third quarter, and not at least the fourth quarter, significantly better than the first half of the year. As Lars said, we haven't had one cancellation of any significant deal. The only issue is that some of the deals are moved out, more related to readiness to bring the product in than anything else. If you look at the short-term outlook, I think the market backdrop are still positive. It is challenging in the corporate space.
I think for all of you that listen and are investors in one way or the other, have also noticed that a lot of those corporate companies, like the large consultancy companies and tech companies, during the springtime and all the way until June, have had a significant shave-off of their share price that are impacting some of the type of decisions and the timing of decisions for continued investments in these types of technology. But over time, I think that will be easily offset by the increased requirements coming in from the defense vertical, and also the modernization using technology inside the energy and utility sector. The defense is by far the fastest and most important structural growth driver for the future, both order intake and revenue. The H2 order intake is definitely expected to increase from H1, and increase quite significantly. There is strong underlying activity.
The pipeline for H2 inside, as I said, defense and energy verticals, are solid and significant, and it is growing day by day. We are starting to see good traction, as I said, not just on the partner side, but also on the sales side, on the new software platform. We have increased the prices on the support and maintenance and licensing agreement with our customers. We have institutionalized that it is mandatory to be a customer of Cyviz to have that as part of the contract.
T hose bits and bytes summed together makes us quite confident that we would go into H2 with a relatively solid ARR base that could range anywhere between NOK 90 million - NOK 100 million . OpEx is a key element. Lars and his team, with me and others, are working on that on a weekly basis. We have initiated internal programs already since February. We are ramping up that to align and balance, I think, and optimize the OpEx to make it more predictable to the pace and speed the business is running.
We will continue into H2 to continue to optimize the cost base, and make sure that we have a controlled, stable, predictable OpEx base heading into 2027. T hose are key focus areas, I would say, during H2 and early into H1 next year. The ambitions for 2030 hasn't changed. We talk about NOK 1 billion revenue, NOK 700 million on the turnkey side, sold both through Cyviz employees and partners. NOK 200 million on our Cyviz Core Technology kit, which is only sold through a partner ecosystem. I think during the second quarter, that reached already around NOK 20 million of the order intake, so it is starting to pick up.
Then NOK 170 million or more on the software management and software platform side. So we are still confident there are potential to increase that, and then also aim with a stable, balanced, controlled OpEx base at 25% EBITDA margin. Some of the structural drivers we see is around defense and security. I think we see that the budgets inside the European defense is increasing, and it is increasing fast. It is important for us to also work with the right partners. We have, during summer, added two of the largest partners across Benelux and U.K. that previously was considered a competitor, but they reached out and asked if we should partner up. I think that opens up a much larger market with less investment on our side, since they are also providing salespeople and technical people to go out and sell.
We have all the important framework in place with European countries, with NATO, with all the others. One of the few companies that has the highest security level through TEMPEST certification for delivering control room and operation centers in a secure environment. We will continue to piggyback on that. We see that energy companies are investing, and they are modernizing the way they run their business, and they are building more and more advanced, secure control room and operation centers. We do believe that that's important way into 2027 and beyond. Then, of course, one of those strategic pivoting we have talked about, the shift to recurring software-driven revenue. We have to go in that direction because the margin pressure on traditional AV, where we came from in the old days, is going down, down, largely driven by pressure on significant expensive hardware components.
We need to have that in place also to build a more predictable business model and profitability. The majority of growth have to come through a partner-led expansion through our Cyviz Integrator Kit that contains our video processor, our software, our operating system, and the platform. It's all about scaling that through the right partners without adding additional Cyviz people or cost.
With that, I think we open for questions, and we have received a good amount of questions. I can start on the top. "Sales channels. You report 60+ , you have 70 partners that is signed up to sell on the Cyviz Software Platform and the software for us. How big share of ARR is now partners in, and how big part is Cyviz? If we take that from April 2026, and what do you expect of own sale versus partner through 2027?"
I think ballpark, the partner sale already through second quarter from April to now accounts for around 15% of the ARR. We do expect that to grow to 30%-40% during the second half of the year. We think that through 2027, the majority, so more than 50%, 60% of the software sale would come through the partner ecosystem in 2027. Maybe you want to answer the second one, or I can do that.
Yeah.
"Why is gross margin so high in percent? Is it more software sale?" I think the answer is quite simple. That's correct.
Yep.
Do you want to fill up?
No, I think we have actually addressed that throughout the presentation quite well.
Then there is a question around covenant breach, maybe you should take that.
Okay, so this is regarding the covenant breach and the overdraft facility that we have. As I said, we have received a waiver throughout Q3, and we are in good dialogue with the banks. With the result in Q2 to quite a large degree being weak because of postponement, we see that what we will deliver in the second half of the year, I feel confident that that will get us on the right track as far as that goes.
Okay. "EBITDA first half is NOK -29 million versus H1 reported. We talk about postponed decisions, the transformation to new platform, projects moved to next quarter. Do you have control?" I can start, and then you can backfill. I would definitely say yes. Without trying to provide any excuses, we are not happy with first half. We are not happy with Q2. The reality is that we haven't lost any customer deal. Hasn't been any deal in the pipeline plan that is gone to a competitor. Two of those large defensives that was due and committed to land in Q2 was moved out due to site readiness. One of them, to be very transparent, is 100-site upgrade project, and it wasn't ready to move technology in. I t's not that much we can do about it. The good thing is it's still there.
It will come, but it's moved out to the second half of the year. The other larger deal that had impact on this was that utility energy company out of Houston, Texas, that came as a new customer last year with a significant order at the last quarter of 2025. These are the second and third wave projects. They have done some internal changes, so the process takes a bit longer. Our team was there again, to negotiate the next round yesterday. We do not expect that to slide or go to a competitor. We are still convinced that we gradually will pick up some of the deficit we had in Q1. I think the sentiment on the platform, we launched it in April. We have 70 partners. I think that's a token, and those are global and regional large partners.
Important companies with a huge customer base. I think that's a token of interest around the future of that partner and the value that brings to partners where they can build a managed service on top, but also provide the level of service that customers is required. I think that part of the pivoting of the company goes well. The partner portfolio on the Cyviz Core Technology side, I think it's solid. We have the right partners in place. I think it's a question on supporting them and helping them now to pick up the speed and continue to grow that business. I think through H1, we have seen in the U.S. and partly in Middle East, especially in Q2, a positive pickup on numbers sold through partners on those high-margin Cyviz elements. The last thing is, it's a recognition from our side as well.
We need to get our OpEx base down. We need to get it predictable. We need to get it in a place where we are not losing that commercial power. We need to drive growth, but we need to have it at a level where we control cash, and we control the OpEx. I would say, do we have control? The answer is still yes.
Yep.
I don't see any sign that should indicate anything different.
"Is the ARR income for the rest of the year included in the backlog?"
Is the ARR income for the rest of the year? We can talk about that. The ARR we are reporting is the billable ones. It's not the base. It's not like the next year's 12-month value. It is what's billable inside this year. If I look at the ARR backlog and look at what's in the backlog today, not necessarily for the rest of H2 in 2026, but the overall backlog aggregated base, it's in the range of NOK 160 million. I t's significantly higher than the type of billable numbers we are reporting today. I think that's a significant improvement. When I joined the company, it was $ 160,000. We are now starting to see the effect of the Cyviz Software Platform and the software.
All other building blocks that have taken it to NOK 76.8 million and NOK 160 million is largely driven by change of how we charge customers, the requirement for customers to have support and license agreement, the way we price it compared to earlier. I think overall, it's a solid base, but the NOK 76.8 million is what's billable. I think we are running out of time. We just want to say thank you for everyone that participated. We look forward to come back here to do Q3, and also t o be able to share a little bit more insight around the ARR side and also how the real sale across partner ecosystem is developing. With that, I wish everyone a good day, and thank you for participating.