F Secure Oyj

Welcome everybody to F-Secure's quarter three interim report session here in the stream, as well as here in the room. The header for this time's report is that we've been focusing on integration of people, technology and product convergence following our acquisition of the Lookout consumer business in early June. But let's move on. So in quarter three, the highlights. Acquisition integration and following up on our strategy execution. I'll get to the details in a moment. Our revenue growth, thanks to the acquisition, 25.8, but organic growth only at 0.3%. Our direct business continued its decline year on year yet partner business grew marginally, less than in previous quarters. In terms of strategy execution, we continued with the launches and signups of our partners into Total, our one single app for all things consumer security. And there has been, unfortunately, some delays in some of the launches. We looked at seven launches only in July, whereas we actually totaled six in the full quarter. So quite a lot of partner delays. They have been relatively conservative in pushing new services out in the third quarter. We do see some signs of early demand recovery, especially as we have our finger on the pulse of direct business. We can see that September was already showing better numbers than what we have seen up until now this year. We are naturally looking closely how that develops during quarter four, but we'll get back to those sentiments later on. Then, as we have fallen short of our own targets of growth and our profitability has been affected, therefore, we have today announced that we will commence change negotiations in F-Secure globally. I will talk a little bit more about that in a moment, but that will commence next Monday. So these are the bigger news. Naturally, we also gave new guidance as we gave a negative profit warning towards the end of September. So that was always something that's important to remind everybody about. So we lowered slightly our expectations for this year's results. Then about the change negotiations. So we are going to be restructuring our global operating model, and this will have also personal changes involved. And we do this so that we align our operational model and our resources and investments so that we can pursue our strategic growth initiatives that we have in the company. We talked quite a bit about those in our Investor Day in September. So if you haven't had a chance to watch that recording, that's available on our web. And naturally also, starting these change negotiations to ensure that we can also financially be on a steady ground as the market has been providing headwind to us in 2023. A maximum of 70 people in the company internationally may be reduced. And then in Finland, a maximum of 50. We have currently, or at the end of September, we had 516 employees in F-Secure, to give you a perspective on what we're talking about here. The estimate of the annual savings out of this, both in terms of operational costs that we are looking at, as well as personnel costs that we're looking at, roughly 9 million. Naturally, this nine million is something that we will partially reinvest back into our growth initiatives. Some of it will also improve our profitability to take care of our financial obligations. The negotiations will start next Monday on the 30th. and they will last, as typically here in Finland, six weeks, or if we agree otherwise during the negotiations, potentially slightly shorter or slightly longer. So here is a snapshot of the kinds of things that we've achieved in the third quarter. So slightly slower than expected conversion to total of our partners. So we've signed up three new partners. We've signed up three existing partners and we have launched six new total services with partners worldwide. with regards to developing our offering and both current offering and new products. On the new product side, the first services went live of embedded security. We also made a press release out of this. So Touch & Go, which is an e-wallet service provider in Malaysia, launched the service in August. And the service that they're providing is called My Cyber Shield. And we also talked about this at our investor day. So for more details, you can check that one out. We launched Sense 4.0 to the market towards the end of August, beginning of September. And this is the first fully industrialized and packaged and productized version of SENSE, which allows our partners to actually run much more independently with the product without the need for us to be helping them in the porting of the software onto the many different Wi-Fi router platforms that are out there. So this allows our R&D and our team focus much more on supporting both the ramp up of the services amongst our current partners, as well as developing the product further. We launched our first DNS partner in Europe and we signed another one during the quarter. And we have continued very actively working on both existing tier one partners that we have in our portfolio, such as AT&T and NTT Docomo, as well as signing up new ones. And we have a good pipeline on that front. So hopefully more things to share with you in our next quarterly updates. And then with regards to expanding into new channels, we made two launches. So Allianz, one of the world's major insurance companies launched our service through their e-commerce channels at the end of September. And as said, touch and go, an e-wallet provider insure tech company launched our service for ID protection in August. Then a few words about the integration that we've been working on very actively now in quarter three. We closed the acquisition of Lookout consumer business on the 1st of June, and this was the first full quarter that we had the team and business within our F-Secure realm. So figures have now been consolidated into F-Secure numbers since the 1st of June. So seven months altogether for the full year. We haven't seen any attrition from the Lookout Life personnel thus far, which is great. Hopefully the situation remains as it is now. Then we have delayed certain growth expectations in the pipeline, actually very similar to what we're seeing in our own pipeline. So the same headwinds that we've been experiencing, some of that procrastination can also be seen in the business that Lookout Life was forecasting prior to the transaction. Our teams from the ex-Lookout Life side and the ex-F-Secure side, who are now all F-Secure fellows, have worked very actively from the end of July in August and in September to plan and kick off a new development program, which comes up with one single product for the new company. combining the best of F-Secure with the best of Lookout Life into one single proposition. And as we shared at the investor day, we're going to be launching the products into deployments with partners and end customers already during the course of 24. We're looking at deploying products in the third quarter, most likely towards the end of the third quarter. And finally, we've also done a refresh round of our company strategy. And on that front specifically, we have decided to enhance our partner business focus also to cover tier ones that we haven't addressed actively up until now. And this is very much thanks to the capabilities, the technology, the experience and the very strong references that we gained through the acquisition of Lookout's consumer business. So that's something that we have decided to pursue now with a vengeance. Then, I know that this looks a bit like a Gartner slide with all the text there, but bear with me. With regards to 2023, this, as said many times earlier, is the year of our single app total. And here are some of the numbers that are in a way showing how much potential we actually have left in converting customers and partners into Total. So roughly 16% of our partner business, the app-based partner business, 16% of the billings are currently coming from Total. 8% of our partners and customers are using multi-module total. By the way, when I talk about these first two numbers, I'm talking about customers who have taken more than just endpoint protection, so that they're using a wider set of total capabilities. So we talk about multi-module total. So 8% of the users have subscribed to multi-module total in our partner business. And finally, The good thing is that we already have 83% of our whole application user base on the total generation of product. So we've already managed to get the same base technology to such a wide base of users. But as you can see, many of them are using only endpoint protection at this moment. In 2024, What's new here is the first bullet point really, which is about expanding our offering to cover more digital moments that we're going to be protecting people from. So what are these digital moments? Messaging. Shopping are, for instance, two examples of things that you will see in the market in the fourth quarter of this year and in the first quarter of next year. And more is to come. So we're coming with more and more scam protection related use cases that Total will be covering. Then in 2025, the second bullet point is something new. So that's when we have the full force of the new converged product between XLOOKOUT Live and F-Secure combined so that we can work on that new experience that becomes like the trusted companion to users out there. So it not only protects people but it also helps people understand what's going on in terms of threats, how to protect themselves and what the service has done for them lately. And then finally in 2026, we're looking for leadership in the tier one partner market, which means that we have partnerships in North America, Europe, Japan, and Asia Pacific. So we're already strong in North America. and in Japan, but we're looking on to expanding that tier one partnership business also in Asia Pacific and Europe. And then what we are intending to offer to those partners and our current partners who are remaining super crucial for us is holistic scam protection. And either as an app, which is TOTO, or full set of embedded capabilities. And the full set of embedded capabilities is specifically important for the tier one partners who already have oftentimes a popular app out there. And then thanks to those bigger partners and the existing partners we have, we hope to have over one billion addressable consumers out there that can sign up to our services. we already go above half a billion at this moment. But that's all from me for now. And now I hand over to our chief financial officer, Sari Sommerkalle.

Thank you. Good afternoon, everybody. Let's have a look at the numbers. So like Timo already said, the growth is close to 26%. And of course, the big growth comes fully through the acquisition of Lookout Life. And the organic growth remained very flat, 0.3. Currency neutral organic growth is 1.8%. So we had some headwinds from the Japanese yen and the US dollar. So some growth, but very limited. If you do the math of all the numbers we have disclosed, you can come to a number for lookout life as well, that there the organic growth was slightly negative. But similar level of development as we have on our side, so no like ballpark differences. Looking at the geographies, we have growth thanks to the acquisition in Japan and Americas. But then if we again look at the underlying business, so the good areas we have in Netherlands, Japan and Singapore, they have been good markets here. And then on the other side, we have challenges in Poland and Germany. And I think that's a story we have heard already for some time. On the direct business side, which also has been weak for a time already, and we also in our profit warning, we referred to the direct channel. So new sales have been challenging already a long time, but this quarter also we saw some challenges in the renewal performance. So negative even there. But luckily we are seeing some positive signs, so we are finally hoping for something better going forward. But of course remains to be seen how things go. I think we've been all disappointed by the consumer sentiment already for some time. On this slide, very much similar information to the previous slide, but here you see how Lookout Life is contributing to our numbers, so of course it is a significant addition, especially on the partner side. And deferred revenue growth is smaller than you see on the full on the total revenue. And this is related to the DB challenges that where it is coming down. And on partner side, we see then proportionally more of the deferred revenue compared to our history. You see these numbers from the report, so not going to walk through the details. I think personally the very happy thing about this slide is now we have comparable numbers. For a year we have talked about the different ways of allocating. So now we actually see here that the admin costs have come down. We see that we have focused on sales and marketing and and our technology organization, so the R&D here. So we see growth there. Of course, the acquisition also has an impact. And looking at the TSAs, a busy table with a lot of information. Here, if we start with the cost of revenue, where the total cost of revenue in the quarter was 4.8, cost through TSA is 2.5, so more than half of that. So here the TSAs have a big, big role, and that will continue still from the lookout side. and on the OPEC side in admin you see a significant change compared to last year so last year we paid 2.6 million in TSAs in one quarter and now it was only 0.4 so on admin side we are really getting independent there are some Small IT tracks that are remaining, but otherwise at admin is really we are on our own. And those IT things are actually related to the tech TSAs. Ensuring that we have access to look out and we're secure as appropriate. Then coming to the profitability on gross margin now, I think the big thing here also is that now we have Lookout Life for the full quarter. So you see on what level the gross margin is now. So Lookout Life used to have a lower level. Our product mix has changed a bit, causing higher hosting costs and also from Lookout Live this fair value adjustment for the deferred revenue also pulls it down and that's something that will reduce quarter by quarter. Looking at EBITDA, so 36.4 for EBITDA percent, so that is of course significantly better than in Q2, but we know that we have in our profitability a seasonal pattern. Also last year Q3 was 40.8%, so quite a good profitable quarter, but still we are clearly lower than that level. But of course, nice to show a good number, even if not surprising. A new slide here, of course, with our current situation with the big bank loan after the acquisition. So it is important to look at balance sheet and cash flow even more than earlier. And if we start with the leverage, so there our target is to be below 2.5 times and we are still at 3.6. So of course we are working our way down below that target. And that, of course, with our strong cash flow, we get down the net debt. So that's a key driver. And of course, now we also announced the savings plans with the change negotiations. So of course, that will also then contribute to ensuring that we improve our profitability. And with this improved leverage and paying off the loan, so equity ratio will start growing from the low numbers. And in EPS, of course, dividends are paid from the actual EPS, but we are also following this EPS excluding the PPA amortization because that tells more about the operative performance. But both KPIs are interesting and relevant in my opinion. Looking at the three first quarters of this year, I think the conclusion from this slide is that we see how top line has improved by the close to 13%. Of course, thanks to the acquisition, we've seen that organic growth has been very limited. And at the same time, EBITDA has come down both in absolute numbers and in terms of percentages. So this is, of course, a combination where we had to take action. We've had higher growth plans and in our business, which is very scalable, when you grow, it becomes very profitable. So, of course, every cent and euro of growth that we didn't get is hitting the profitability. And this is the outcome of that. So we keep the same outlook that we updated in September, aiming at revenue of 128 to 132 million. that remains the same and the profitability between EBITDA between 41 and 45 million so all here remains the same and likewise also the mid-term targets until 26 we have not touched those so this 9 million of savings that we talked about so that is to ensure that we are able to focus on those growth initiatives that we have planned for the future to deliver the growth and also to improve the profitability so that we keep us on the track that we are targeting for our mid-term. So that was all for our presentation and now we are happy to answer questions.

First, regarding the Lookout Life contribution to Q3. If I calculated correctly, the Q3 number was 21% below Lookout Life's previous year, excluding, of course, the impact of prepayments. But what would have been the decline with the prepayments included, so that they are kind of wiped out from the equation?