Welcome to yet another quarterly presentation by Kerium and we are to be presented the results for the second quarter of twenty twenty five. Presenters are CEO, Christian Malian and CFO, David Granat. A Q and A session will follow with equity analysts and viewers can ask their questions in the live chat. By that, let me welcome Christian and David. Nice to see you.
Thank you, Matthias.
Thank you.
Please go ahead with your presentation and I'll be back for the Q and A.
All right. So we will then jump right into it. So yes, there we go. So first off, warm welcome to the carrying report for the second quarter of twenty twenty five. I'm Christian Olejen.
Together with me, David Giranaut, our CFO. So let's open up with the highlights of the second quarter. And I think it's really important to state that we see this as a very challenging quarter. And while there are some silver linings to it, it is also a quarter where we feel as if going forward we will have to perform in a different way. And first off then, I mean, we did break through on the fixed alarms or the stationary alarms, the hubs, which are our sort of main category in France.
We have never had any sales of this type. Most of our business has been on the mobile solutions, where we are very well regarded and leading the market. But breaking into this stationary alarms is really key because France is set for a string of pearls of the commissioning of two gs, three gs and then PSTN come 2030 in the upcoming years. So becoming an entity there and getting substantial orders is of course very, very crucial for us. In addition, we also reported that we won a fully managed contract in The UK.
Now to many of you out there this might not make so much sense, but to us it's super important because it's the best contract type we could find you can find in The UK because it sees you delivering across the full range of services and hardware and everything integrated in a way that allows us to drive a really good business. These fully managed contracts, they are probably around 5% of the total contract base in UK also serves as really important reference points for further fully managed contracts. And last but not least, we also overhauled our entire digital and web infrastructure in the period. This is very much related to our efforts in B2C where we were stuck in legacy solutions that were not conducive to actually driving good digital consumer centric business. And with the highlights out of the way, let's head to sales and gross margin for Q2 twenty twenty two.
And overall in Q2 twenty twenty five as we stated very challenging, we saw a decline in reported sales with 11.9%. Now to understand this decline, it is related to various sources. First off, it's the accounting of the financial lease classifications in the Swedish business that amounted to SEK15.1 million in comparable terms. The lower product sales accounted for SEK11.9 million and this was mainly due to the performance of our German and Norwegian business in the same period of last year which was extremely strong. Last but not least, we also saw a negative effect SEK5.9 million of currency effect.
In further detail services decreased 9.4% to SEK147.9 million and product sales decreased 18% to SEK54.2 million. And as mentioned, this is very much in contrast to Norwegian and German performance same period last year. We do note that the gross margin stayed reasonably steady and even increased to 43.3% up from 41.7% reflective of efficiency efforts in spite of the lower sales. And with that we had to our markets. Now first off in The Nordics, we saw sales decrease 15.8% compared to Q2 twenty twenty four.
While our business in Norway reported continued growth, Sweden's reported sales were impacted by the lower revenue of this upfront effect from the financial leasing contracts. It's worthwhile to notice that if you exclude the financial leasing effect, the region actually grew with 1.4% in the quarter. In this Q2, we recognized $1,200,000 as hardware deliveries in Sweden classified as financial lease and booked as sales in the quarter compared to $16,300,000 in the second quarter of twenty twenty four. So this implies a direct negative impact of SEK15.1 million on net sales in Sweden in the quarter. For the rest of the year, the negative impact of this accounting principle, it will remain significant as the financial lease classifications for the upcoming comparable quarters were 24,200,000.0 in Q3 of twenty twenty four and 15,200,000.0 in Q4 of twenty twenty four.
However, the impact will be lower from the first half of twenty twenty six as the recognized financial list for 2025 are SEK 3,200,000.0 in Q1 and as stated now SEK 1,200,000.0 in the second quarter. As more and more contracts are recognized as operational leases in contrast to taking the upfront revenue as a financial lease this also means that the share of recurring revenue will increase. We note that the gross margin increased to 40.7% compared to 38.3% in Q2 of twenty twenty four. And then turning to The UK, which as a single country is our biggest market. Sales decreased 9.3% to SEK71.9 million in the quarter.
Product sales decreased 8.9% to SEK31.4 million. It was SEK34.4 million same period last year. But the effect here was that it was very low at the start of the quarter and picked up and gained considerable momentum towards the end. So from our perspective, it's really important for us to retain this momentum. As mentioned, we had a really important win in this Gloucestershire fully managed contract.
We hope to be able to have this as something that allows us to convert more of this going forward. And these partnerships then they include provision of technology, installation, services and so on. So they are really, really important to us. Turning to The Netherlands, we saw sales grow 4% compared to Q2 in 2024. The product sales declined but from very, very low levels and the gross margin come in at an impressive 61% up from 55.1% same period last year.
In the other markets as you know primarily DACH, Germany and France to a little extent Spain, but not to a meaningful degree. Sales decreased 16.6% to SEK 21,500,000.0 and gross margin decreased somewhat also due to product mix effects. But as we have stated many times for this reported segment of other markets, we usually see these quite big swings and you can actually also see it there on the graph on the screen where some quarters come in really, really heavy with big order intake and others are a bit softer. And with our markets out of the way, we turn to profitability and I'm happy to hand over to our CFO, David Gironaat.
Thank you, Christian. And now an update on the profitability for the quarter. EBITDA amounted to SEK26 million compared to SEK38 million for the same period last year, giving EBITDA margin of 13% compared to 16.4% last year. EBIT was $10,000,000 in the second quarter compared to $22,000,000 last year reaching an EBIT margin of 4.9%. The decline is mainly due to lower reported net initiatives in sales and development partly offset by higher gross margins.
Despite lower net sales, we secured a healthy profitability for the second quarter. With that moving on to cash flow. I'm happy to see that cash flow from operating activities amounted to $20,000,000 in the second quarter compared to $40,000,000 for the same period in 2024. In the first quarter, cash flow was $1,000,000 at the same levels at last year. Investments in tangible assets increased with $4,000,000 Also as Christian mentioned, as less contracts were classified as financial lease increasing investments in tangible investments tangible assets.
Cash at the end of the period was $34,000,000 and net debt was $178,000,000 a leverage of 1,300,000 We are well financed with sufficient cash to deliver on our strategy. And in addition, we have access to a credit to facilitate potential acquisitions. And with that, I hand over to Christian for a summary and conclusions.
Thank you. So again, I think it's very important to be clear on that while there are some positives here overall, we are of course not happy with the quarter. That's very, very important to note. There were a few good developments such as breaking into the French market on the stationary side, the first substantial order there following pilots and trials and testing and so on. So that's good.
The fact that we had better momentum towards the end of the quarter is also something that makes us optimistic. It was predominantly in the start of it where we saw that the sales were not moving as intended. And of course, this win in The UK is super significant. The challenges, I think we pointed them out, it was the low product sales that definitely impacted us, but also the effect of the revenue recognition principle applied to financial leases for the Swedish business. And it's a bit of a paradox, I think, where you are on one hand having very tough comparables.
And then if you exclude that effect, you see that you have a very modest at Nordic region level, but still a growth. So the priorities for us going forward, it is a super strong focus on building on the momentum that we have. And this is not just the product sales, which are sometimes more direct, but it is also on the tender side to really make sure that we capitalize on all opportunities in a good way. For many tenders, there is a period where you sign the tender and then you sort of come into action two or three months later that is a bit different market by market. So there is still opportunity to sign new opportunities and actually start delivering on them.
And we also note that the M and A landscape and pipeline is somewhat moving. There are more discussions and dialogues on that side in our industry than there's ever been before. So that's something. And to conclude before we head into Q and A, we retain our guidance exactly what we said. We said a softer first half and a stronger second half and we expect and are optimistic about an improvement to net sales profitability and free cash flow compared to 2024.
And that concludes the presentation and we hand over to questions.
Thank you so much, Christian and And today, we are joined by two equity analysts. And we will start off with Jakob Lemke from the bank SEB. Please welcome with your questions, Jakob.
Okay. Thank you very much. My first question relates to the guidance, which as you said, Christian, you reiterated here today. I guess my question is, given that this now demands a quite strong second half of the year, could you maybe elaborate a bit more on sort of what you're seeing and what will drive that strong second half of the year?
Well, I mean, you know, we have a big contract starting up in Norway that is quite substantial. We have the Gloucestershire win, for example, that comes into play on top of our service revenue. So if we look at the totality of our pipeline and our forecasts, we do stick to our guidance. I mean it's very clear that this is going to be tough. But for now we have ample opportunity to actually meet what we said we'd meet.
And I will leave it at that since the guidance is indicative of a soft start and a stronger second half.
And just a reminder for these contract wins, you mentioned Norway and the one in The UK, both of those are in Q4, right? So we should maybe expect Q4 will be better than Q3?
Norway starts October 1 or the October 10. I can't actually remember, it's either of those. And the Gloucestershire one is expected to start in Q3.
Okay. Then my second question relates to ABBA framework in Sweden, which I understand has been for individual living has been postponed to May, I think, 2026. So it would be interesting to hear just how you see this impacting you. And also if you can give a more maybe general outlook on the Swedish market?
Well, it's a very, very good question. And I mean, number one here is that we can't influence ADAS timelines basically. That's not for us, that's for them. From what we understand, the timeline to prepare for the contract is the same. That is what they are saying.
But the contract start has been delayed. Now is this good or bad? To us, it's very hard to gauge because on one hand it will mean that it might take longer before we see bigger volumes of tenders coming to market. So that would be in the negative bucket. However, an extension of two months could possibly lead to a number of customers being forced to prolong or extend existing contracts that usually comes with a slight uptick in the fees or cost of course.
And it can also lead to some municipalities in Sweden who sort of were waiting to say, well, we don't really have faith in this timeline, let's go for it and tender on what's already known on the known current contract. So I think the jury is still out. We are not horrendously upset about the delay. We are rather more questioning on maybe the capacity to deliver on time and so on and if there is a risk of further delays. But short term might be a positive.
Longer term, yes, it will see a continuation of this situation to some extent in Sweden. However, if we go by our win rates and how successful we are in the Swedish market with the opportunities that are there, we're very confident that we have a very, very good chance of bringing home the opportunities on the table.
Okay. And just a follow on regarding the sort of number of contracts that are out and so on. Are you seeing any trends that maybe those that might have been waiting are now deciding to do tenders before the new framework?
Well, I think it's important to stick to the facts and the facts are that there are fewer contracts in the market. That's the data we see. And of course, there are lots of dialogues out there. But I would still say that what we're seeing is compared to last year and the year before that a markedly lower amount of contracts available to bid on to the tune of 20% to 30% of normal contract volume.
Okay. Very clear. Then maybe more of a technical question regarding the financial lease. Should I interpret sort of what you're saying here today and what you write in the report that you expect less financial lease contracts going forward at the higher proportion would be operational lease?
David, do you want to comment on that one?
Yes.
This is what you've spent many months digging into.
Yes, I mean that is what we expect. Yes. We noted out the comparables for both the Q3 twenty twenty four and Q4 twenty twenty four and the comparables going into 2026 is also what we report now in year to date numbers. Of course, the other and new contracts, because it's new contracts that basically drives the financial lease classifications, but we foresee that there will be more operational leases going forward than financial leases, yes.
And is this something is it something that's new in the sort of contract structure? Or is this you sort of trying to change how you account for this? I mean, I appreciate that operational is better in Yes. My
And I agree. No, we are using the same principles as before. And if we decide to change principles, we will inform in our reporting. Absolutely.
And it is no change to principle, no general change to contract terms, slight change to price possibly impacting a little bit. But I think the key part is that the share of sales that are truly recurring under the operational list that is of course more desirable for us because we then of course have a better matching of how our business runs and what we actually report. So I think this is positive even if it creates tough comparables.
Okay. Totally agree. Moving on, I'm wondering a bit about The U. K. And I noticed that service revenues was a bit weaker in my opinion. I'm just wondering if there's any So particular behind
the main reason for why those are lower is a contract that we've had with the Council of Oxford. There's a really substantial one that has now left us in this quarter planned. So new entrant taking that over via a technical, but councils in UK that are adjacent to one another can call off on each other's contracts, bit of a strange process there. But that is the reason for the decrease. And for The UK with the activities that are going on both commercially and efficiency wise, I think both me and David are actually really excited to see the development going forward.
We are very, very positive even if the numbers for the first half are not so great. Okay.
Then just regarding on what you said about France here. I mean, should we see it as sort of a breakthrough here in Q2 and that France can be a more meaningful market for you going forward? Or yes, what can you say?
Absolutely. I mean France is 67,000,000 people. I think it's almost the same amount of people as The UK and that squarely puts them at the second or third biggest country in Europe. And while we've had explosive growth in France over the last couple of years, it's been from very, very low levels. The reason for that has been that our primary offering where we are market leading in France is our mobile category, the type of solutions that you carry with you.
And the keen eye probably saw some level of slip up where we accidentally posted on LinkedIn or the next generation of watches. But since it's out in the open, I can probably comment on it from our dear marketing department. But the bulk of the French market is in stationary older equipment. And France has a pretty aggressive schedule up to 2030 doing this analog to digital where they phase out two gs. This order is related to the phase out of two then three gs and finally analog PSTN.
So that is what's ahead there in France. And for us not having sold a single piece of our kind of core offering over the last couple of years just doing really well in the mobile category, this is a breakthrough. So hopefully, there's more to come there.
Okay. Sounds promising. Maybe a final question just on individual living, if you can provide a status update there.
You mean assisted living?
Yes, assisted living, sorry, yes.
Yes. So with full transparency, the other agreement for assisted living is currently being reviewed for all the entrants. And we did note that we do not seem to be able to come on to that contract as we expected. This is a bit surprising because we're also seeing some of the really strong players in this domain who are not qualified either. For us, the main reason for not qualifying seems to be in our remote monitoring solutions, cameras and stuff like that.
However, while that is a bit of course not what we expected, we do see that our main focuses and maybe fastest opportunities we have are in The UK and that what is known as schemes, which is basically an assisted living facility that's a senior live in a kind of communal house with a small staffing kind of a front desk where installations are found in all the apartments. That is probably the main target for us seeing that there is a very, very low degree of digitization in these facilities and our solutions are catering really well to that. The majority of the old equipment are analog solutions and often really Frankenstein esque kind of unique installations. And the estimates from the TSA, the industry organization in UK is that about 15%, 18%, best case 20 of all these facilities in The UK, which are very numerous are currently on analog. So it's a really big opportunity that we are pursuing.
Coupled with that, we also continue our efforts in Denmark. That is a very good market for this type of solutions. So hopefully more to come on that.
Okay. Sounds promising. That's all for me. Thank you very much.
Thank you.
Thank you so much. Jakob Lemke of SEB. And before we let Alice Beer in, I would like to just ask a follow-up question. The sales decrease in UK and Ireland, explained that a bit, but a viewer really wants to understand how come service revenue fluctuates so much in UK?
Well, a part of it is actually from our sales related to private pay that actually does move quite a bit. So we have about figure 13,000, 14,000 private pay users and that goes up and down quite kind of month to month on how much new customers are signing up and how many customers are churning so to speak. Now the majority of the churn is not that they are leaving us as a customer due to not liking us. We have one of the highest scores on Trustpilot for this service in all of The UK. But the main reason is that they either transition into another form of care or they actually are deceased.
So that is a very it's quite impactful because it's quite a lot of sales happening in there. And also there services provided in UK that are not just fully recurring. It could be mobile response activities. It could be a municipality that says, well, I want this 700 seniors assessed based on their needs by your competent people. So we know what type of solution to set them up with.
And of course, that has a degree of impact also.
It can be installations.
It can be installations, yes. So and this is why these fully managed contracts are so important because they cover the full range. They are not the same as the Swedish ones where you kind of bundle everything. They are distinct in terms of having different categories of delivery. But the normal way things are done in The UK is that you buy things in a compartmentalized manner.
So you buy your monitoring center over here and you buy your hardware over there and you might even buy your installation over there. That's the more normal way that market works.
Thank you. And by that, let's move over to Alice Beer of ABG Sundal Collier. Please go ahead with your questions, Alice.
Hello. Thank you for having me. Okay. Just as a first question, could you give us any more color on what the timing of different tenders would mean for you? What I'm looking for is really how much certainty or visibility is there in a stronger H2? And if anything, could derail that?
Okay. That's a very good question. And I would say in our business overall, we have a pretty good or pretty good we have a very good view on the tender pipeline and implementation timelines because they are usually set as part of the tender. So in the tender, say, start date for this contract is to be on that date. And then some markets like Norway, for example, they are very much pragmatic.
So there's a negotiation period and so on where things can move a little bit. But in general, we are fairly certain of when something starts and what effects to get out of it, so to speak. Of course, it's the issue of do you know that you will win the tender, which you of course do not always know. You do a classification and qualification of all the tenders from our great commercial teams of course. However, that said, our win rates, especially in Sweden, we're quite confident with them.
So we have a very, very good chance whenever we see something qualifying as pretty good for us. However, on the product side, and this is a lot harder for us to predict because the time from a call off an order from an existing or a new customer, they can be very, very short. And sometimes that is really making the hearts raise on our supply chain teams because it can be really substantial orders that seemingly come out of nowhere, especially in The UK. That's probably the hardest part. In DACH, for example, it's more common to agree on a delivery schedule, so you can kind of plan for product sales in a different way.
But I think for us, it's a lot harder to forecast the demand on the product side. Would you agree, David? Yes. Services and longer tenders, we're always 85%, 90% certain of how things would play out.
Okay. Thank you. Very clear. And you've touched upon this already, but it would be great if it's sort of a summation. There are a lot of moving parts when it comes to product split in terms of the lack of financial leasing, tender activity and so on.
And how should we think about the split between service and product sales going forward? Maybe that's difficult as you just mentioned.
Well, it's difficult in many ways without complicating things too much. Let's not forget, we are also doing really big R and D investments into our digital presence platforms. And this is not just to the consumer side, but our the value that is in the software layer that enables better technology enabled care. So will that be a product or a service? Well, it will probably be a service.
Will the market expect to kind of integrate this? I mean, we do everything we can to try and make our customers understand that it's better if you kind of take in the full value of the Karyom ecosystem with products and hardware, with software and with great services. That's what we are striving for. At our heart, I mean, we are a technology company. At the end of the day, that's what we do.
That's what enables all the value that we provide to others. And then in some markets, as we have said, we also offer a range of sort of human led services because it makes financial sense to do so. And in other markets, we're just a partner on the technology side and a really relevant partner because you can't do all the other services without really good technology. So I would probably say that we want to keep our product sales as high as possible. But if we do our business development right, we can hopefully change the minds of customers where they start sort of sourcing the full ecosystem.
And we are creating the opportunities to move within it to source different parts based on their needs to be as customer centric as we can. And this is also something that is ongoing amid this challenging quarter and year that we are doing a lot of heavy lifting in making sure that we have a standout kind of full end to end offering where the leading star is actually the software. That is really, really important because you can make a choice on where you want to put the smartness and the intelligence. Do you want to put it in the firmware and in the physical unit? Or do you want to put it in a place where you can control, manage, steer and update in a more efficient way?
And this is something that we are seeing really, really interesting developments in. And hopefully, we'll be able to talk more about that in the future.
Okay. Thank you. And I understand that you might not have these figures know them by heart, but how are the comps from last year in terms of financial leasing in H2? And will that affect both service and product sales?
I think we actually reported them in the report. And if I'm not mistaken, Q3 financial lease was million something like And for Q4 it was SEK15.1 million. So we are as you know, we have throughout since this year and all credit to David and his team, we have increased the transparency on the reporting kind of report by report. And this is logical next step to understand Karium in a better way.
All right. Thank you. I missed that. But when it comes to contract duration, do you have any large contracts that are now up for renewal soon? Or what's the timing effect on that?
As far as no, we do not have any substantial well, yes Lundskommun is actively tendering now in Q3 that we are aware of. It is a substantial contract. Obviously this is home turf for us. We've had many years together. So but that one is of course meaningful.
But that's the only one that I'm aware of that is of some volume, so to speak, in the near term and kind of for the second half of this year.
All right. Great. And on the gross margin then, the trajectory has been strong. But could you tell us a bit more about what comes from product mix and what comes from things you have more control over? What I'm looking for is really if the tender activity would pick up in H2 or H1 twenty twenty six, would that be a negative effect on your gross margin?
No. I think we've steadily improved the gross margin for all the right reasons. So it is improved on the product side, higher volumes, which is obviously key when you build things, so that has a very strong connection. But also the work with the suppliers where we've been successful. We have good long standing partnerships.
We are able to run open books with many of our suppliers, which is very helpful for being efficient. And I think we got this question, a similar one, if it was last presentation or the one before that, that we are very much focused on the efficiency to drive the gross margin even higher on the direct costs in the services side. So we don't foresee us running into a situation where that keeps all of a sudden increasing. I think rather the opposite we should or increasing decreasing, sorry. We are very committed to keep driving it in the right direction.
And we think we have a substantial amount of initiatives that tells us that we should be able to do so.
Okay, that sounds good. And just a final question then on costs. This quarter, OpEx continued to grow with the lowered net sales significantly impacted EBIT and margins. Should we expect continued lower margins in H2 due to the leasing? Or are you planning on doing anything OpEx wise that could support margins short term?
As stated, are definitely actively surveying and acting on our overall kind of cost structure and composition to see where we can be as efficient as possible. Sometimes that is expanding platform to be able to automatize in a way where you might be able to make some efficiencies. The one thing we are not touching, I think we've been clear on that is our R and D. That is what we are aiming to retain at these levels possibly a little bit more, but that is absolutely required and also some investment in sales and commercial people to drive our business forward. So apart from that, on one hand, lots of efficiencies being worked in the sort of known big cost centers and investment into the things that create a good future for us and allow us to perform well also.
All right. That sounds reasonable. That was it for me. Thank you for taking my questions.
Thank you, Alice Beer of ABG Sundal Collier. We will continue around expenses. CapEx is up quite a bit this year. How long do you expect this increased cycle CapEx cycle to last?
What do you say, Dovyn?
I mean CapEx increases, I mean, mainly it's driven by intangible and tangible. And on the tangible side, we have the products out as we have on operational lease. And when we do more operational lease than we do financial lease, the tangible is expected to increase. So the CapEx investments, especially on the tangible side will continue. And I mean, we have a lot of development want to do also on the intangible on the product development. So it will probably continue.
Yes. Thank you. You mentioned R and D and you're working on your own platform. Yes. That's something that continues.
In concrete terms, what is coming here? What do you see there?
Well, I think the thing that we have been very clear about is this notion of being an end to end kind of provider, where the hardware, the back ends, the operators' views, everything you need to kind of provide a really good service to enable millions to live good lives. That's what we want to control. And the way we think about it is that Carium should be an ecosystem or a platform that you connect to and you use bits and pieces or everything with high opportunities to integrate to other solutions that might not be ours. We do not need to be the best in the world at everything. We want to be best at owning the kind of core and that enables it.
So future investments, it's ranging from smart AI solutions that creates really strong efficiencies in the call centers, for example. It could be new monitoring solutions that allows you to respond to wherever there is an issue or an outage in completely new ways and so on. So there's lots of bits and pieces there. But I think the changes that have occurred since we got our new CTO on board, kind of sneak started in autumn last year and was full on from January, we're seeing really, really good development in tangible terms on how the roadmap is updating and so on. So we expect to have a lot more to offer going forward.
And as I think most viewers know, we are also very busy with transitioning this complete landscape of our Swedish end users to transition them fully onto our own platforms. It takes a lot of time. We started in May of last year. Some development is being done in parallel with actually migrating the end users. But if we look at the performance we're getting out of having the seniors and the customers on our own platforms, it is a very, very marked increase in efficiency and our ability to service them in a really, really good way.
So we're very positive about that and we are we tend to say in the halls of Carrion that we're not far off where it's very hard to find a better option. And the interesting thing is that once we're at that point, the others will remain or reasonably remain, whereas we will keep developing. So it will be really interesting to see what comes out of this.
Okay. Bright future.
On the technical side, yes.
Thank you. And you touched about on this, but it was a tough quarter, especially with the comparative figures. But you say that you're optimistic for the fall. And since the start of this year, you had a black first half year and you expect a strong second half year. Could No, you elaborate a bit more on
I think it's as simple as that, that we knew that the first as we communicated in our guidance also that the first half would be soft and the second one would be improved. And we retain that because that is what we are seeing by all the data and opportunities and pipelines that we have.
Okay. And let's move on to well, you are communicating the effect of financial leasing in a more clearer way now than before. Can you describe in a bit educational terms how it works and Yes. The
Can I try first, David, and then you can correct me if I'm wrong? Yes. I think I'm closer to the layman's version of this. So how it works is like this. In the Swedish market, the contracts are bundling a lot of services altogether expressed as one revenue per user, if you will.
But there are a lot of things going into this. It's the hardware bit. It's the monitoring services bit. It's the connectivity bit. It's the platform bits.
It's all these different partial components. So what happens when we take a contract on, we win it. What we do then is that we are per the IFRS fifteen and sixteen and maybe also 18. We correct me if I'm wrong.
Fifteen and sixteen, yes.
Fifteen and sixteen, yes. Good. What we do is that we basically run all the value of the components, the pricing, the contract duration and so on through a series of big Excel files developed by our dear friends PwC to determine is this qualifying as a financial or operational lease. And if it is a financial lease, what is done then is that since this huge bundle of combined components go into being the service, the hardware component of that full value is taken out and taken upfront as a sale with corresponding EBIT effect, no cash flow effect. And that is then recorded as the sales.
Now what happens is that you also in your books have to put a reversal in. So you kind of have to pay this one off over the duration of the contract. So you recognize it at the start, you make sure that you kind of pay it back over time, but it is a way of not being in a situation where you are starting out with the customer and you take a huge hit on all the costs, you get nothing for it. So it's a practice that is not strange in any way. I mean thousands of companies use this, but for us it presents a bit of a challenge in the here and now. David, how did they do?
Very good, would say.
I can just add a few points. I mean, all the sales contracts in Sweden are leasing contracts. Initially, they are all operational leases and then they could be reclassified as financial leases based on kind of the criterias that you look on. So that's one thing. You both have the net sales and the EBIT effect.
And the corresponding effect in the balance sheet you can find on the short term and long term receivables. Okay.
Thank you for that clarification.
I don't know if we get like teachers licenses for this, but this is hard. I think this is very important to underline. It is a complicated practice that is hard to do and it demands a lot of resources for us also to actually do this in the most diligent kind of way which we do. So it is a practice that you really consider whether there are benefits and there are downsides to it. But the important part is that it is a revenue recognition principle and that we don't change.
So we are bound by that so to speak. Okay.
Chime is running, but one more question is what is your best guess on when the effect of the Ada agreement has on the market will not be an issue anymore?
I think in a way, I think the longer Ada delays, the more of a catch up effect you will see. That's what I'm guessing. It's I mean, this is them and their timelines. So that's what we expect. Do we believe I mean the data on the table is that they are clearly delaying.
And we just have to adapt to that. That's our reality. And we need to do well in other places. So to us, it's like when the time comes, we don't know the criteria for the new contract of course. But we will do our best to retain our great win rates and then we will probably be in a good situation.
So I can recommend monitoring the other website. They don't tell anyone when they update anything. So you have to look yourself.
Okay. Thank you. Besides that, what should investors keep an eye on for the second half of the year?
I mean, you should hold us accountable to saying that we're going to deliver on the guidance. Guidance. And any indication heading in the right direction there should be seen as us doing a good job. So I think that's number one thing.
Okay. Thank you so much for the presentation and all your answers, and we wish you a nice vacation.
No time yet. Lots of things to do.
Yes. Good. And also want to direct a big thank you for everyone that has been watching. See you again.