F Secure Oyj

Good morning. Good afternoon, everybody. Welcome to F-Secure's quarter one interim report session. My name is Timo Laaksonen. I'm the president and CEO of F-Secure, and I will be joined a bit later on by our chief financial officer, Saaris Omerkallio. Good to have you with us. Let's get started. So as the header says, we had a solid start to the year. Our revenue grew clearly, 31%, very much thanks to the company acquisition or business acquisition of Lookout Life we made last year, but also thanks to organic growth in our partner business. Also, our direct business was performing well, specifically on the billing side, thanks to strong renewals and increasing average revenue per user. So that was good. I'll get to some of the details a bit later on. What was something where we were not happy was that our gross margin was burdened by certain items that Sari will talk more about. These were related to our transitional service agreements ending with Secure at the end of the year and now us taking those on in the first quarter. But more about that by Sari as said. We were focusing, as we've stated earlier, more heavily on the partner business in new business development. And as an endorsement to that effort, we signed a massive partner, a communication service provider, in the month of March. And that's something that we believe clearly indicates that the acquisition of Lookout Life is actually bearing fruit. This is based on embedded security capabilities that we have developed and are developing further. And that is going to be something that will show more significantly in our numbers in the years to come. But naturally, there are some initial startup fees also that are helping us already this year. Then in our direct business, we are continuing to focus actually on consumer experience. We are doing improvements on that front that make it smoother and easier for our customers to go through our journey, as well as what we've done already in the first quarter, driving retention and upsell, thereby increasing the average revenue per user even further. Now, we announced already at our previous quarterly results session that we've now integrated the organizations fully. What used to be F-Secure and the Lookout Life team that joined us in the beginning of June last year. And that new organization is now fully up and running, including the changes we implemented in our change negotiations in the fourth quarter. That is now accompanied by our renewed corporate culture, which is in the rollout phase. Also a little bit more about that later on. But that's in a snapshot. Looking good in terms of revenue growing and signing up tier one partnerships, precisely as we've stated in our strategy, where we want to put more focus on and direct business holding the fort very well. Now, there's a lot of text on the slide. This is not a Gartner slide. This is an F-Secure slide. So first of all, we're driving more value through rollout of total. And on that front, we didn't sign many new agreements. we signed some but even so we were actually already in the in a phase where we can see how the partners we've signed up in 22 and 23 are now getting more and more of their customers moving on to total we almost tripled our billings from total compared to last year's first quarter so very good development over there. We also have some of our more important partners who are now converting all of their base of users, the ones who have been using separate F-Secure applications in the past, into the all-in-one app Total and that is bringing hundreds of thousands of users into Total from these individual apps. in direct business. I've already mentioned that retention and average revenue per user have been going up and on that front we've been driving for instance improvements in the subscription journey. And other things that we've done is that we've actually done away with, in a way, entry level discounts to customers who are joining us. So when somebody is now renewing the service, they see that it's fair, that they're paying the same price as new customers. There is no benefits that we're giving to new customers as opposed to renewal customers. Both are equally important. Also, we've made sure that our pricing is now on a level playing field between our partners and retail partners and direct business. And that also represents a fair pricing policy from customer's point of view. And what has naturally helped us boost total business is that our net promoter score, NPS, has now reached a new high at 50. So that certainly helps when we are asking people to renew their subscriptions. But that's all on the total side that I would like to comment here. Then in terms of expanding our market coverage and increasing the size of our accessible market. So especially going after tier one partners, the biggest service providers in the world will over time allow us to address tens of millions, if not hundreds of millions more consumers out there with our services than what we're currently doing. We're aiming for at least a billion addressable consumers behind our partners by the year 2026. Now, the deal that we signed is actually for embedded security. And that means that we are providing five different capabilities to this partner who develops this application that they're going to bring to the market and launch to the market towards the end of quarter three. They develop the application. We provide, in a way, the engines so that they can create that service. Why we are so quiet about the name of the partner is that they naturally operate under competition and they want to keep it close to their chest at this point in time what they are building and with whom. So we hope to be able to disclose the name once they launch the service. what this deal is helping us do first of all is that we are enhancing our embedded product portfolio in areas that are super relevant for major partners out there and secondly we also develop our own maturity and capabilities related to serving tier ones such as service levels uptime delivery capabilities, partner care, security operations and so forth. So this is a company-wide exercise that we're embarking on here that is moving along well. We have a pipeline of more Tier 1 partners, both extensions with current ones as well as completely new ones. And hopefully, you know, as the year progresses, we'll be able to once again disclose more information about those as we sign up new business. We have come out in the fourth quarter of the year with something we call trusted shopping or shopping protection. And that's been received very, very well in the market. So initially we launched it for Windows and Mac users. But in this fourth quarter, it's going to be available also for iOS and Android users. So that provides you information on how reliable and trustworthy is the shopping site that you're about to enter. And in line with our number one security experience, we've made it a very elegant one, the experience, how people will be notified if they should be proceeding with that site or if they should be thinking twice. We've also launched artificial intelligence powered messaging security, which means that SMS messages on iOS and Android platforms will be scanned for potential threats. And what I can say as an interesting snippet of information is that When people receive SMS messages that are potentially malicious, what we tend to think is that the only way that you can recognize if it's good or bad is to look at the link that is forming part of this message. But that is no longer enough. There may be messages that have no link whatsoever, but they're asking you to do something, and 59% of the malicious SMS or text messages that we've stopped at the gate, 59% of them can only be recognized by using AI. There is no link or the link is so new that there is no known information about it. So AI is actually super crucial in making sure that we protect the users. Finally, expanding into new channels and new verticals. The work has continued pretty much on, or actually on plan, where we are aiming at signing up more insurance companies, banks, payments providers as our partners, the same way as we've typically done with communication service providers. We signed one new partner on that front and we did a conversion to Total with a partner in Denmark, Trygg Insurance. So that's what we've achieved on the business front in the first quarter. A few words about the completely new capability that we have just now launched in F-Secure Total. You may remember that we've had what we call internet security. That's the endpoint protection. Many years ago, that was called AV. We've had VPN. We've had password management, we've had identity monitoring, parental controls or family rules as we call it. Now we're coming up with a completely new module we call scam protection. And that will be a constantly growing group of capabilities how we keep people safe from scams. And this is just the beginning. So we start with six and we're going to be adding more every single quarter. So I already mentioned the SMS scam protection on messaging, I mentioned shopping protection, banking protection is something, it's the one we've had longest. But then there are browser plugins that will keep you safe in the native environment when you're using either Chrome or Safari. there's wi-fi protection so if you would be connecting to a wi-fi let's say in a coffee shop or a mall or or an airport you actually get notified if that wi-fi is trustworthy or not a little bit the same as we do with shopping protection but this is for the wi-fi that you're connecting to and we have an ad blocker these capabilities are now all of them are available either on all of the operating system platforms or some, and they are going to be fully available on all four platforms, Windows, Mac, iOS, and Android by the end of this year, but all of it is already out there. So this is tangible new value that we're providing in total that comes at a separate fee to users. Finally, we've now launched our new corporate culture in March of 2024. So as I've stated a couple of times, we acquired the Lookout Life business last year. Two years ago, roughly, we de-merged from WithSecure. So now was high time for us to actually come up with our own identity as the new independent F-Secure, having joined forces with Lookout Life. And these are the four values and related behaviors that we are now driving in the company, keeping focus on the right things, making each individual making a difference. empowered just doing it we're not referring to a sneaker brand here we're referring to the attitude that you know we want to get things done quickly and finally daring to care which refers to the fact that you know through a feedback culture we should be all giving both positive and constructive feedback continuously to our fellows so that we develop faster. So as you can see, quite a lot of this has to do with increasing our pace. The world is not waiting for us and we definitely realize that we have to not only stay at the same pace as the world, but even go forward. So this is what we believe will be one of those three fundamentals, strong strategy, excellent competencies, and a culture within which we perform successfully. I believe that's all from me at this point in time. We'll get to the questions later on, but I'll now hand over to Sari Somerkalli, our Chief Financial Officer.

Thank you, Timo. Hello, everybody, and good to see you again. Let's have a look at the financials and go through some background here. As Timo said, so revenue grew by 31%, which is thanks to the Lookout Life acquisition. And organically, it was a bit higher than 3% and currency neutrally close, closer to 4%. And about the currency, so Japan had some headwind from the currency, so that's where we have the biggest difference. And also in the US, the local performance was better than the reported one, but this time not as big difference as earlier. Looking at the geography, so the same story from last year continues. So of course, in the US, lookout life had the biggest impact. And then in Asia and it's Japan where it's really significant. And there you see that the difference between the reported and currency neutral is really big. That was quite significant market for lookout life on top of US. Looking at the organic world, so there also Asia grew nicely, and Japan, Singapore, Hong Kong were the growing markets, and in Europe, Holland continues to grow. Then challenges, similar story what we've been telling. So in Poland, we continue to face headwinds. It started from the regulation change already some time ago, which has sort of had an impact on the whole market dynamics in the country. And Germany is in the partner business, another challenging market, but that's more related to customer who is not yet the total customer and development has not been positive there. In direct channel, revenue development is still negative, but as Timo said, the nice trend from Q4 continues, so billings are actually developing positively, and that's of course like money in the bank, so the deferred revenue from the direct channel is growing, and that will be then reflected in the future performance. And here you see again the channel split number, so partner channel growing faster than the direct side. And the direct side growth is sort of waiting for the future. And in deferred revenue, you see from year-end 9% growth. And that comes actually even more from partner side. So with this new CSP tier one partner that Timo told about and what we've had the press release about. So even if the service is not launched, there is quite a significant startup fee. that boosts the deferred revenue in the partner channel. And that's something that is a normal way of working, even in the old F-Secure, but normally smaller numbers, that we get the compensation for what we are building for them. And then also on direct side, the deferred revenue grows. Looking at the cost side, Here, of course, OPEX is higher than last year because the company is bigger. But I think the positive thing is that it grows clearly less than the company size, so we have been able to improve the OPEX efficiency. And it's a sort of scale benefit of being a bigger company than before. You see that the admin cost went down from earlier being 11% of revenue, so now it's 10%. With the Lookout Live acquisition, we didn't get any admin type of people and it was very limited recruitment that we had to make. So some efficiency indeed there. Then you see that the R&D part continues to be on the same level in terms of percentages as before. So this is really the focus and investments in the future. And not being in this picture, but you also see that capex numbers are up and those are also from the R&D and technology area. So that's really showing the investments in future growth. And in sales and marketing, so there is growth, but still it's less of the whole revenue. In that number, also actually marketing share is lower because we have discontinued the paid acquisition in the direct business numbers. Then a couple of words about the TSAs. So you see that now the WithSecure TSA column is out of this picture. So we don't have any TSAs with WithSecure anymore. It's only the lookout side. And the number is a little bit smaller than we had last year TSAs with Secure, a little bit different structure. And basically we have two main contracts remaining and one of them will be discontinued now during Q2 when it's one year from the acquisition. So in Q2 these numbers should be already a little bit smaller, but will still continue existing. But as such, we are buying services which we could also do internally or from somewhere else. So this doesn't really change the profitability or you should not expect like big changes because of these. Then looking at the profitability, if we start from the gross margin picture, and these are all the histories, the revised numbers, we changed the way how we look at gross margin and cost of revenue during Q1. These are now based on the new methodology, and it's clear that the trend has been down from last year. And the main factor there is Lookout Life acquisition. Lookout Life had lower gross margin percent, but also they had lower OPEX cost. So it's a little bit different structure, and it's related to the product mix. When we are in the embedded business like Lookout was, to a big extent, so it is a little bit lower profitability. So that's the main explaining factor. Then there is also this fair value adjustment that has a small impact. And then there is an impact also from our technology autonomy. And now we've gotten some benefit from being in the WithSecure platform. And now when we are on our own, so we lost some of that benefit. And this should be the base on which we are building the future. And if you are asking if this number was a surprise to ourselves, so yes, we definitely had the ballpark correct. We knew that we would lose some of these synergies and we knew, of course, what the lookout level was. But maybe there are some decimal points that we would like to be higher and we are definitely working on that. And for example, so we have now when we have bigger volumes, we've been able to make new contracts and there is one significant one which is starting from April that will give us then better discounts now that we have the bigger volumes. And then when part of these lookout TSAs will be terminated so that further increases the volume that we have in our own hands. So we are now on a learning curve to take things in our own control and really monitoring the volumes in a completely different way compared to how it was earlier. And on EBITDA, lower level than same quarter last year. And the gross margin definitely has an impact on that. Then one new picture based on, of course, the numbers that you've seen. but I think it is quite significant how F-Secure has changed. If you look at the cost structure that we have since the Lookout Live acquisition. So now we talked about EBITDA percent and the gross margin, so that you see on the top. So cost of revenue is a bigger chunk of our costs and OPEX is a smaller chunk. And then there are totally new items, the depreciation amortization, those have gone up. Of course, there are the PPA amortizations, but that is not cash flow. which is of course good from the cash flow generation point of view. And then the financial items, of course, with the bank loan, that's quite significant. So all in all, the blue part on the bottom, which is the net profit. So it is both in terms of percentages and absolute numbers, it is smaller than it was. But if we think about the cash side, so despite the fact that we are paying so much interest rate, so the cash impact is still positive in this picture. But quite a big change when we compare to last year. And talking about the cash flow, so cash flow generation was lower in this first quarter compared to last year's corresponding quarter. And the main factor is the dividend payment. Last year, we paid the whole dividend in Q2. There were also some other challenges with our receivables process, which we mentioned, I think, in the report. But then we paid the whole dividend and now it's half of the dividend in the first quarter. But that's the main explanation. And of course, quarter four was extremely good in terms of cash flow. So not a benchmark, but something, of course, that is a nice thing when it happens. But you cannot expect the 140 percent, obviously. And About some other KPIs, the leverage which is a new KPI that we are following since the acquisition so that went up a little bit and there again the dividend is the reason and equity ratio similarly went down from the year end and there as well it is a dividend payment that is explaining that. And then in terms of the outlook for this year, so yeah, a solid start to the year and not changing the outlook, but continuing towards this. And message holds that, of course, we are aiming for the higher end, but still so many uncertainties on the market that we didn't want to change the promise yet. So that was our presentation, and now we are happy to take questions.

Hi, it's Atte Riikola from Inderes. First about this new Tier 1 customer. I think you mentioned in the report that that contract already accelerated growth in Q1, so is that related to those startup fees? Because I think the contract was announced just in the end of quarter, so was it a big impact from that?