Good morning everyone, welcome to our Q1 interim report presentation. My name is Kate Linwood, I am your host for today's session. With me today, as you can see, is John Vestberg, our CEO, and David Nordström, our CFO. We will start today's session with a presentation by John and David, then we will follow with a Q&A session. Please write your questions in the Q&A pane, then we can answer questions at the end of the session. With that, I would like to hand over to you, John.
Thank you very much. We'll just need to get the sharing started as well, Kate. Would you be able to start the sharing?
Should be working now. Yep.
There we go. Thank you very much, Kate. Again, welcome to this Q1 report from Clavister. As always, I'd like to start with giving you an update of the quarter in a summary. You might have read our report newsflash already, but the key takeaways we'd like to bring from this quarter is an increased sales. We are continuing to reduce our operating costs, and as a result of that, we bring an improved cash flow. If we look at our business, our base business, meaning our Next Generation FireWall business or NGFW, and our identity and access management business, continues to drive what we call a stable growth and a stable development in the quarter. I'll come back to the other business as well in a while.
We are introducing a new key metric in this quarter called annual recurring revenues or ARR. I'll get back to that in a while. I'm super happy to see that our annual revenues grew by 16% year-over-year, ended up at SEK 109 million by the end of the first quarter. If we look at net sales, grew by 12%, while as I mentioned, we continue to reduce our operating expenses. In the period, we were able to reduce our operating expenses with around 11%. We keep on improving our margins as a result. For the third consecutive quarter, we're showing positive EBITDA margins. Cash flow from operations positive with SEK 3 million. Quite a good improvement from same quarter last year with around SEK 6 million year-over-year.
As a final takeaway from the quarter, a fairly solid cash position with SEK 47 million, slightly higher than the end of Q4. Moving into our base business. In this presentation, we combine our next gen firewall and our IAM business into a general update because we see a stable development of both. They are very much in line with our expectations, but they still contain an upside in my opinion. We didn't see any disruptive orders coming in this quarter, so essentially this growth in our base business is basically driven by our regular sales operations. However, I see and we see a lot of good opportunities to further increase the growth pace and the growth rate in these businesses. I'll give a couple of practical examples.
You might have noticed our press release recently whereby we're optimizing our channel strategy. We are moving into a very strong relationship with our distributor Arrow. Arrow is, by the way, one of the world's largest electronics distributors. We start with a deepened collaboration in Sweden, where Clavister becomes the preferred security vendor for Arrow. This is an absolutely fantastic opportunity for us to grow our business even stronger in the Nordics. Another practical example, we have introduced a so-called partner success management team. Other businesses might call it customer success. It's more or less the same thing.
Basically, it's a group within our commercial organization that has the sole responsibility to drive recurring business, making sure that we nurture our existing channel, our existing end customers, and as a result of that, drive more upsell, more cross-sell, and at the end of the day, reduce potential churn. A third example, very practical one. A lot of our products sit with our customers, our end customers, for many, many years. The cost of the licenses, the cost of the support is typically not the biggest cost for our customers. The biggest cost typically comes from maintaining products, installing products, replacing products over time. We would like to make that life simpler or easier for our customers, so we introduced something called Extended Life Cycle. We know from history that our products typically have a very long duration, long lifespan.
Instead of rip and replace the product just after a couple of years or three years, we allow the customers now to run our software for almost indefinitely, basically as long as the associated hardware is capable of supporting our software. This is another way for us to drive software license revenues and of course, as a result of that, gross margins and, you know, keeping the customer happy at the end of the day. We move on to our defense business, quite a lot of things has happened within our defense offering over the past year, I would say. Initially, we started off by providing firewalls only into the defense sector, which is again, quite a big offering.
As you might know, who have followed Clavister for a while, you know that we have a wide IPR platform with different kinds of software, different kinds of technologies. We have, over the past quarters or essentially over the past year, expanded our offering into defense to expand from our so-called CyberArmour offering, which is our ruggedized military firewall, which we provide to BAE Systems as one example. We've expanded this with more traditional firewalls, which are used in still defense context, but in a slightly different manner, not as embedded as our CyberArmou r solution, but more in a data center fashion. This is, of course, a big industry as well within defense. Another point within defense is our 5G LTE security capabilities and in the sort of public telecom market or the civil telecom market, if you like.
I think you're familiar with our 5G offering. You might not know, however, that within the defense industry, as part of a complete defense system or defense solution, the defense powers typically deploy private 5G networks or private LTE networks in order to maintain communication in times of war. Clearly, we need cybersecurity there as well as in a public 5G network. Here our 5G technology comes handy. With our identity and access management, we are able to provide this as well in a defense fashion. We typically see this with sometimes data center-related deployments, but also slowly but surely moving into the context of platforms as well. There is an increased maturity and increased knowledge of these things, obviously with quite long lead times as always with defense.
Finally, within our defense offering, we utilize our artificial intelligence or machine learning engine that we acquired some time ago. We have already demonstrated in practical proof of concepts and collaborations with, among others, the Swedish Defence Materiel Administration, using this technology to detect anomalies, attacks, for instance, in satellite communication, defense communications. All in all, we have broadened our offering to defense. I mean, in all essence of that, we expect to see a broader pipeline of opportunities that can be built based on this offering on top of the traditional or original offering. Of course, we provide a set of professional services to this to help our defense customer to essentially support them from the initial requirements phase through the deployment phase and the aftermarket phase.
Looking at the defense business then more specifically, this is no news. We continue to see the increased defense budgets being allocated and the situation in Ukraine and the overall geopolitical situation just continues to drive this narrative. Nothing new, but continued. As I mentioned, the perception we have when we talk to potential defense customers is an increased maturity. Just going back a couple of years, the concept of cybersecurity within a very traditional industry was a bit tricky. Nowadays, in current discussions, we are met with a completely different understanding, and I think the cyberattacks in Ukraine as part of the overall war situation has dramatically increased the knowledge and the maturity. This is a key driver as well.
We have a number of previously won projects, and we just want to reiterate that we continue executing them according to plan. We saw initial revenue coming from those already end of last year. We continue to see net sales arriving from those during this year as well. Continued according to plan. Over the past periods, our commercial team within defense has built a very healthy pipeline of additional defense opportunities. I would like to emphasize as well that we're seeing a broader pipeline today that spans not only over a few or single customers and a few projects, but over multiple actors and also with end customer projects in multiple European countries. The base is broader. Again, the lead times are long, so we need to keep that in mind.
At the end of the day, my expectation is that we will see additional business opportunities being won during this year, significant such. Moving to our 5G security business, the civil one, not the defense one then. I think we can clearly state that there was a slow development of our 5G business in the quarter. There seems to be, and we get proof points from other vendors as well, that there is an overall slow investment sentiment from the mobile operators, especially on the 5G core networks, which is the key driver for our solution. The rollout pace as a result is slow. As a result of that, the new license deals for Clavister is not at the pace we would like to see.
We have taken a number, and we're taking still yet number of measures to increase the growth pace. It's with regards to the collaborations we have, with regards to our business model and so forth. We expect to see some result from that. Still, at the end of the day, the key thing here, given the long-term relations within 5G, the engagements we have with our existing customers is very good. That is something that continues to drive professional services engagements for us, and it serves as a very healthy base for future license sales. We're happy with that, but of course, we expect a higher growth in terms of software sales. As I mentioned initially, we are introducing a new key metric in this quarter, a metric known as annual recurring revenue, or ARR.
This is a well-known concept within the recurring revenue or subscription-based software businesses. We introduced our new business model a little bit more than a year ago. At that time, our business model was predominantly built up with one-time or perpetual revenues with ingredients of recurring elements. Today, the majority of our business has transformed into a recurring term-based, subscription-based business, which is, of course, healthy and serves as a very stable platform for our revenue generation. If we look at this metric specifically, by the end of Q1, we were able to report close to, or a bit north of SEK 109 million of recurring revenues. This has to be seen, of course, in relation to our total top-line number. As you can imagine, our annual recurring revenues has a significant portion of our total business, and this is reliable business.
We expect, of course, or we have to expect some level of churn, but we compensate that typically with upsales and cross sales and other activities to maintain and to grow our recurring revenue. If you look at the comparison with the previous quarter, or the previous year, this is a growth of around 16%, which is something we're very happy with. With that, I'd like to hand over the word to David to talk us through the key metrics.
Thank you, John. This is for those of you who have been following us for a time. Video is not the only new format. We're also introducing the key metric development to look at how have a couple of our metrics developed over a trailing 12-month period dating back to 2019 and going forward. First is order intake. As you can see here, we saw a strong order intake development during 2021 to a high degree driven by our large BAE order, who we now have started to deliver upon. We haven't had similar large orders coming in during 2022, and hence this metric has, from a trailing 12-month perspective, been dropping. We're confident in our ability to win new larger contracts going forward.
I think we expect to see an increasing order intake as we move forward. That's one of the explanations to the order intake decline. The other one is the fact that we made a change in our business model where we're less hardware-centric than before. We're selling hardware at cost really with a markup to handle our costs for shipping and inventory and so forth. That has an impact on order intake. More importantly, we have been selling shorter contracts, but with a much better net sales impact. If we look at net sales, we see a very big difference from order intake, which has been in a declining trend for some time, which is not the case for net sales.
Because here we see the impact of the strategic shift of selling contracts on a shorter average length, but at higher price points. This is an important driver in net sales. Even though that order intake has been declining for a period, we see a much more positive impact on net sales. Moving over to the gross margin, we also see that the impact from our transition to our new business model, that has eased off where we have moved into stronger margins again in Q1 for a couple of reasons. Reason number one is, we have more and more contracts in our new business model, creating a baseline for our growth at good margins. That's very important for us.
The second one, which is also important, is what John said about Extended Life Cycle offering. Historically, when we launched our new business models and new hardware platforms, customers were required to move from old appliances to our new s- range of appliances to also move into the new software contracts that we introduced. We have changed that and are now offering the Extended Life Cycle offering on legacy platforms, which is very good for several reasons. I mean, it's good for a customer, as John said. It's cheaper for them to get access to our newest offering. It's also good for us in protecting our margins because we then don't need to sell hardware appliances with low margins in order to move the customer to the more high-margin software offering.
This is also a driver behind increased margins. The last graph here is the adjusted EBITDA over our trailing 12-month period. I think this is something we're proud of to say that for the first time in history, Clavister has for a trailing 12-month period, a positive adjusted EBITDA. I think this is an important milestone for us. Because this is might be something that you might have questions about, why were adjusted EBITDA more positive in the end of 2020, early 2021, and then fell back again a bit in 2022? Two reasons. The reason number one is that we had a large one-off perpetual contract in Q3 2020 with a very high positive impact on EBITDA.
That was a one-off, and since this is a trailing 12-month, that impacted positively EBITDA for the coming quarters. The second reason was that we had challenges with growth during 2021, the drivers, the thought drivers for net sales meant that we had higher costs. We saw that that wasn't successful, hence we launched a cost optimization program and drove a more focused strategy of our operations and our sales. Since then, we've been able to drive higher growth combined with lower cost, and that is the key driver now behind increased EBITDA. A more deep dive in actual metrics. Order intake is declining, decreasing with 6.3%.
As I said, this is, this is a combination of mix, but also again, the shorter contract length has a negative impact on order intake, but positively impacting ARR and also net sales. ARR is growing with almost 16% compared to last year. New business model is an important driver. Higher volume of contracts is an important driver. We've also been successful in significantly raising prices in the market we're in, and this is also an important driver for increased ARR. Net sales grew with almost 12%. If you adjust for FX, the growth is 9.3%. We're in a positive growth trajectory here when it comes to net sales, and we're glad to see that.
Gross margins, supported by, as said, new business model and the extended life cycle offering. We have a bit less hardware in our sales mix, and I think this is the extended life cycle offering is this important part in that, but also that we have been in a transition phase. We still are, but the transition phase eases off as more and more contracts are in the new business model, and that sale, it is a lower driver than for more hardware sales. We're in the software business, so we're essentially pleased with that. OpEx, we still see positive effects from the cost optimization program. We have been successful in streamlining operations, which gives us a corresponding OpEx drop of almost 8%.
We have some non-recurring OpEx in the period of SEK 1.4 million. If you adjust for that, the decline is almost 11%, 10.6% to be more specific. Again, I think we're glad to see yet another quarter where we put growth up on a higher trajectory and still are able to push OpEx down. I think the driver here is more focus. We do what is the key things for us to do to drive more growth. We put less focus on other areas, which is not as important for us in this stage. Hence we can cut costs. Financial items, quite a large stability here.
A positive thing is, I mean, even though that interest rates has been increasing quite dramatically, we are not seeing any increase of financial items at all. Majority here is also, as before, non-cash. We have currency effects since our EIB loan is in euros. This is an important driver here which makes this something that can fluctuate a bit between quarters. This was the last quarter we had the costs for warrants to EIB. We have having financial costs for that for five years. From a pure accounting perspective under IFRS, this is not this have no and will never have any cash flow impact. From Q2 and onwards, there will be no impact of those warrants in financial items going forward.
I think that's a positive thing to take with us as we move forward. Some comments around the balance sheet, cash flows, and FTEs as well. Still, we continue the trend of a bit lower CapEx. Primarily, streamlining of our operations means that our tech investments is also slightly lower. We have a slight increase in amortizations due to historic tech investments was a bit higher, looking backwards a bit. We see that hitting our P&L now. Cash flow, continued improvement up from minus SEK 6.3 to minus SEK 2.3 before working capital changes. The increased interest rates or market interests have a negative impact of SEK 1.5 here. If we adjust for that, the...
Remove the effect of increased interests, the negative cash flow is actually SEK 0.8 million as to have comparable levels with last year here. We are able to translate our improved EBITDA into tangible improvements in cash flow. Looking at also, though, then after balance sheet changes, we are cash flow positive. The comparing quarter was impacted by almost SEK 50 million in form of government support in deferred tax payments. We have a similar effect in this quarter of SEK 15.8 million. You know, deduct for this and we clearly see that we were cash flow negative in our operations after balance sheet changes last year, and now we're not. We're seeing a positive cash flow impact, which is SEK 4.3 million in this quarter.
Looking at our full-time equivalents, here we clearly see the effects of working with streamlining our operations, working with the structure in Clavister. We're down from 132 FTEs last year to 93. Number of consultants have a slight increase from 13 - 16, and this is really to balance the FTE reductions who have been, I would use the word, significant compared to Q1 last year. These were the things I planned to say, John. A couple of words around the outlook before we move to Q&A.
Yes. Thank you, David. Essentially, we maintain the same outlook for 2023 and for the upcoming quarters as we presented previously. Starting at the growth, the top-line growth, we believe that we can grow the top-line growth to an average of 20% over the next three years, basically as an average number. What are the reasons why we believe this can happen? Well, first of all, I'd like to reiterate that we have now transformed our business into a recurring business model, which essentially means that we can spend our commercial efforts in winning new contracts and doing upsell, cross-sell, and other activities that essentially drive growth, rather than protecting our top line by revisiting each and every customer for maintaining contract. This is a key driver.
Additionally, we see potential effects coming from the opportunities we have in essentially streamlining our business in our base business, the Next-Gen Firewall and the IM business. That is, for sure, something that we expect can have, you know, a positive impact. Not the least, the impact coming from continued deliveries into the defense segment and potentially new contracts of significant size. All taken together, 20% is something we not only aspire for, but also, you know, realistically believe we can achieve. If we look at the OpEx levels, again, following the trend we've seen and the, you know, full level of impact coming from the lowered OpEx and the cost optimization program. OpEx levels will be lower in 2023 compared to last year.
As a result of this, combined with the sales and the top-line growth, improvements in cash flow is clearly the outcome we see. Positive EBITDA for the full year is what we expect. During the half, the second half of the year, we expect to reach the inflection point where the operations actually shows positive cash flow for, to be honest, the first time in history in Clavister. That's the outlook we're aspiring for. With that, we move back to you, Kate, on to the Q&A session.
Yeah, thank you, John and David, for sharing your insights with us. Let's move on to the Q&A. I've seen we've received a few questions already, but please continue to submit them to the Q&A pane. First question is for you, John. You say in the CEO letter that you're not entirely pleased with the growth rate, and you see room for more growth. What levels are you aspiring for, and how do you plan to get there?
Mm-hmm. No, I think, you know, what I just mentioned in the outlook section where, you know, realistically, this business should and could scale to a- at least 20% year-on-year growth level. That's the aspiration we have as a threshold, as a baseline. The activities to get to those levels are, you know, essentially reaping the benefits from the transition of the business model. That is a clear growth driver. That's behind us now, so we can see the upside of that coming over the coming years. Additional defense deliveries, defense contracts is a clear growth driver just from the sheer size of those type of deals. Thirdly, but not, you know, not the least, we believe that we have many small opportunities to gradually increase the growth rate.
You know, a few examples were mentioned already, extended life cycle for our appliances, the increased focus, the optimized channel sales, and so forth. All taken together, there are, you know, strong reasons, at least from my side and from the business side, to believe that we can achieve that growth.
Great. Thank you, John. We have received a few questions around the BAE contracts that are outstanding. I can read one here saying, "Is the contract with Slovakia for BAE Systems CV90 still a possibility? What about the Czech Republic contract?
Mm-hmm. Mm-hmm. Yep. Just as a quick background for those who might not know. We signed the framework agreement with BAE Systems a couple of years back and then entered into the first commercial contract regarding the Dutch Army's major upgrade of their CV90 fleet. We have deepened our relationship with BAE on several levels, including the tech levels, but also the deliveries of the ongoing projects. BAE has been extremely successful over the last year winning new contracts. From them winning or signing new contracts to that dripping down into the entire sub, you know, subcontractor chain, that's a quite long lead time. Without, you know, being able to dwell into details, of course, we are still very positive that we can see, you know, major deals coming from BAE still this year.
Great. Thank you. Next question is regarding Fortified ID. I read in the annual report and in the interim report that there is an ongoing legal dispute with a, yeah, a business called Fortified ID. Can you please share some information on the topic and also, yeah, how that may affect our business?
Right. What we can state with regards to that specific item is what we write in the annual report and what we comment in the interim report as well. There is a legal situation. There is a legal process. As soon as we have more information to share, we will of course disclose that. For the time being, we have to let the legal process run its tasks. With regards to business and business impact, our Identity and Access Management business is a base business for us that has shown and continues to show stable growth. This is an area where we win new customers, we maintain the customers we have to a very good degree, and we see great opportunities going forward to expand that business, not only just in Sweden and the Nordics, but also to other markets.
Germany, for instance, is a market which is starting to digitalize heavily in their public sector, and as a result, they have an increased demand of the identity and access management type of solution. We see no negative impact from this legal process. From a business point of view, we have a lot of expectations of opportunities in that area.
Great. Thank you. The next question is around our news that we have communicated around Arrow, that Arrow will be our sole distributor of Clavister products in Sweden. Yeah, could you elaborate on how that will affect us in-house, but also how it fits into the existing channel partners and resellers?
To give a little bit more of a background, Clavister has always been and is a channel business. Essentially, we sell through a channel, meaning distributors, partners, resellers of various kinds. We have had over the past years a little bit too versatile and too spread out channel, especially in the Nordics. Keep in mind we're still a fairly small company, we need to make sure that we are viable and we are the preferred vendor for the partners that we engage with rather than being a secondary or third-tier supplier in comparison to, for instance, Fortinet, Check Point or the other incumbent American vendors.
We've been working with a handful of distributors in the Nordics, but over the time, we matured into the decision that it's better for the Clavister business to stay focused with one major distributor where we can be relevant for them and they are relevant for us. Arrow has been working with one other cybersecurity vendor in our space, but as part of this setup, they are clearly communicating that Clavister takes the position as their key preferred security vendor. This is in Sweden to start with. Keep in mind that Arrow ECS is one of the world's largest distributors in electronics. If you look ahead into the future, we could for sure hope that this collaboration can spread, and we see positive synergies into other countries as well.
Mm-hmm.
You know, we don't change our business model, we don't change the way we operate, but we essentially focus and make sure that we become more relevant for fewer than average for the many.
Mm-hmm. Yeah, adding to what you said, I would say that in the journey we're in to drive more growth and drive more profitability, what we see then also then try to handle in our operations is, I mean, we need to partner with organizations and drive their business. Rather being thin with many, it is better to look at certain partnerships to make sure that how do we grow their business and incentivize them to sell us more.
This is why I've been trying to focus on, rather than having two distributors in Sweden, it is better to have one and make that scale so that partner is incentivized for us, or rather the distributor in this case, to sell our products, to invest in salespeople, in the knowledge of our technology to be able to sell that in a good way. I think that just adding to what you said, I mean, this is an important part of understanding the rationale behind, focusing on one distributor in Sweden rather than two, to give critical mass to the distributor and build their business with our technology. Great. Thanks, David. The next question will also be for you.
Can you please expand on major loan repayments, renewals, especially deferred tax payments?
Yes. We successfully prolonged those early in this year. There will be no major tax repayments of the deferred tax during this year. We expect that to be during 2024. We had one...
Small part of the deferred tax who where we seeked a three-year repayment schedule and got that. I think we're pleased with that. That is the aim for the entire amount of the deferred tax to seek a three-year repayment plan. We don't know if we will succeed in that, but that would be the key option. That would be more manageable from the cash flow perspective to handle that over a three-year period. That would be the key solution to that we're looking into. The fact that we are on that and are repaying on one of those deferred amounts is a good thing. I think that's what we can say at the moment.
Mm.
Yeah. Good. Staying with you, David. There's a big drop in FTEs in the quarter.
Mm.
Do you see any risk not being able to fulfill your growth ambitions with a smaller organization?
No, I don't, the short answer. I think so far, the fact that we are being more focused, a smaller team has actually. Now we're able to drive more growth because I think the focus and the direction has been more clear. And we are doing, to a higher degree, the right things and doing less of other things, just detaching from the goal to be a leading cybersecurity vendor in Europe. No, I see no risks for that actually. No. I mean, if you have another view.
No, no, I fundamentally agree.
Yeah.
I think the numbers speak for that. You know, increased focus leads to growth and being able to do more with less.
Mm.
I think that's the key recipe here.
Mm.
Okay, great. Yeah, to round off, I have a question for you, John. What are you most proud of in this quarter?
I think, you know, as a summary, the fact that we continue executing on what we set out early last year already, you know, moving Clavister from a history of nonprofit into a growth trajectory with quite some harsh decisions that were made to bring down the cost levels, we see the effects of that. I'm proud of, you know, having an organization that is able to grow at the same time in a smaller costume, in a lower cost base, and seeing that that yields result. I'm super proud of that.
Mm.
Great. Thanks. To you, David, what do you want to highlight from the quarter?
I think it's really the same, but to add a bit of a different flavor to that then, I mean, we have been working very hard with the cost base to get that under control. I mean, we're in a very high inflation environment, and still we're dropping our reported OpEx with eight something percent. If we adjust for non-recurring costs that disrupts comparability, it's actually a drop of 11%. I think that is an achievement which leads to a positive EBITDA and that we're able to drive more growth.
I think it's that because that has been a hard focus for us. I'm glad to see results there that we're able to maintain our focus on costs and still have a good direction in where we're heading with the business and growth. We have good ambitions for where we're heading forward.
Great. Yeah, with that, I would say we would conclude our session today. Thank you again, John and David, for your presentation. Thank you for all the attendees for joining us today and for your questions. A recording of this session will be available on our website in very shortly. Have a great day and bye from all of us.
Thank you very much.
Thank you.