F Secure Oyj

Hello, everybody, and welcome to F-Secure's half-year financial report session. Warm welcome to people here in the room as well as on the stream. As always, I'll be presenting together. My name is Timo Laaksonen. I'm the president and CEO of F-Secure, and I'll be presenting together with our chief financial officer, Sari Somerkallio. She will join me later. But let's get into it. So as the header says, in the second quarter, we feel that the major achievements that we made were the strides on product, technology and service development. Without further ado, our financial results and business progress we made in the second quarter was very similar actually to the first quarter of the year. So we grew modestly around 2%, a bit over 2% currency neutral. And our revenue growth was mostly thanks to the Lookout Life acquisition we made 13 and a half months ago. In the partner channel, growth was modest. I'll get to the actual details on the next slide. Our average revenue per user is increasing as expected and actually slightly above plan. But there are some challenges that we are clearly seeing with some partners of ours who have been with us for a long time, but are having certain difficulties in their core business that they're dealing with. Direct business, very similar as partner business on the same trajectory as in the first quarter. So actually beating the plan. and very much thanks to high average revenue per user. So our total app is, in a way, delivering on promise in terms of value, both for consumers as well as for us. Our profitability was on a good level in the second quarter. We made lots and lots of developments on the operational level, which are as such not directly related to the total product or embedded product. we made core technology platform and in a way operations related improvements, which were optimizing our cloud operations, unifying suppliers, and in a way tackling certain core technology issues that have been maybe on the to-do list for some time. And at the end of the quarter, released a new version of Total, which came with a completely new module we call Scam Protection. And I'll get to the details on that on the next slide. But that's the high level. Overall, a good quarter. We would have liked to see a little bit more growth, while profitability was good. Then if we dig into the details a little bit more, so on the average revenue per user side, that's one of our crucial drivers for business development. The total release that we made right now is only going to be delivering further value to consumers and ourselves starting from the second half. But it's got very good Let's say it's resonating very well among our partners, the new release and scam protection is very much something that first partners are already signing up to as an additional module, naturally increasing the average revenue per user. Our own forecasts for how many of our partners and how many of our end customers on the direct business side will go for multi-module total. We've beaten that forecast, so we're progressing better than we expected. But like I said, unfortunately, some bigger partners are having difficulties in their core business, which is then decreasing our revenue, unfortunately. And therefore, the positive effect is not as big as it could be. In terms of total, let's say that in 2023, it was typical that our partners were selling the new total, the single app for all needs, only to their new customers. Now it's starting to shift in 2024 that more and more of our bigger partners, meaningful partners are actually introducing multi-module total to their full customer base, which naturally drives value much faster. than only selling that new offering to new customers. So that's good. And for instance, Elisa, Vodafone, Ziggo in the Netherlands and Telia in Sweden, they represent over a million users. In our direct business, I would say that the primary value driver is precisely ARPU increasing as people are taking a bigger entity of total into use. And that's the primary reason why our Billings is growing positively. Then in the middle part, the second area how we are driving value is by developing our offering, i.e. total, and coming up with new products. And I would say that on the total side, the introduction of scam protection was by far the biggest initiative we made. There is one more, in a way, functional area that we will introduce as an addition. to scam protection at the turn of quarters three and four, but 80-85% of scam protection is right there that we plan to introduce in 24. In 25, more things will be introduced, but that's resonating very well. On the tier one side, we made improvements in many things. As you say here, I already mentioned production operations, but developer experience on embedded side is very important. Our tier one partners are developing applications either by themselves or they are using third party app developers. So developer experience is something that is crucial. We've taken meaningful steps forward on that front and then naturally in our partner care and overall service maturity. It's also a part of our product offering that has increased as we have moved on and continues to be a very important focus for us in the second half of the year. We have enhanced our embedded security portfolio. You remember potentially that we made a press release in March that we have signed up a new tier one partner and we are developing new embedded capabilities as part of that program. We've gone forward in significant steps in the second quarter in developing those additional embedded security capabilities. Also, an existing partner of ours, AT&T, with their Active Armor app, which is their consumer security app they provide to their mobile users. or sell and provide as a bundle to certain premium customers, the App Store ratings are now upwards from 4.4, so very, very strong, all the way up to 4.7, 4.8. So Active Armor is now a very liked application. And then at the end of... Quarter three, we will be releasing, as earlier advertised, our unified product offering for Lookout Live and F-Secure, combining the best of both worlds. And that's right on queue at this moment. So that seems to be both delivering on the schedule as well as on the functionalities expected. But more about that in next quarterly release. And finally, on the driving further value into F-Secure business. We're expanding into new channels and partners. By far, our biggest focus right now in terms of more significant growth is on the Tier 1 side. That's clear. And on the Tier 1 side, communication service providers are, in a way, the first domino that we want to take down. So on that front, we have a really promising pipeline of additional partners that we're working with, and that is progressing at a relatively good pace, considering Tier 1 partnerships may take years and years to develop. But we are happy to see that there are several who are considering their options right now. Naturally, nothing confirmed before we have ink on paper, but a lot of opportunities out there right now. New verticals development is slightly slower than what we have expected. we have a good pipeline, but it's maturing very slowly. So compared to the tier one opportunities, it's clear that new verticals provides us with growth opportunities, but slightly slower than what we see now on the major communication service provider front. Then we are now about 13 and a half months from announcing the Lookout Life acquisition. So what's happened since? So in short, the technology backend is now in our own control since the end of May. So at the end of May, we took control of the technology backend that takes the feeds and source information from Lookout. And Lookout continues to serve us as one of our crucial partners in terms of providing us with threat intelligence and feeds that we use to provide services to our customers in very much the same manner as with Secure. So we see that both with Secure and Lookout continue to be important partners for us in terms of providing info feeds and threat feeds that we use to provide services to our end customers. Our net debt at the end of June, now at 166.6 million. I've talked about this already earlier in our quarter one results release, but the fact that we were able to sign up a new tier one partner, I would say so quickly after the acquisition of Lookout Life based on a lead that had been worked on for quite some time already by Lookout Life was a good testament to the fact that We not only can continue developing the business that Lookout Live had, we can also take it to the next step. We've focused quite a bit on uniting our cloud services and supplier contracts and so forth, which has resulted in better operational development than we may be forecasting in the first half of the year. But that work continues. we believe that there is still more work to do on, in a way, operational optimization. Oftentimes, when you talk about applications that are using cloud services, you want them to be as optimized as possible in terms of chattiness, how much they need to consult the cloud, and that's one obvious area where we are still doing work with many of our services. We are currently seeing that our planned synergies, cost synergies and revenue synergies are going to be materialized in 24 as planned. But to be honest, they are still relatively modest, but they are on plan. But that's about the lookout consumer business acquisition. If I was asked today, was this a good move for F-Secure? I would say a resounding yes. Then a few words as a reminder of what is it that we provide to our consumer customers and to our partners, to their customers. This is a massive portfolio of services that we can provide today. Practically all of this is available through the Total application. And most of this, or much of this, is already available through embedded security modules. Our intention is naturally that everything is available on both Total and as embedded security. But this is also going to be affected by co-creation efforts that we have with our partners, which direction goes first, Total or embedded. But this is a very wide offering that we have these days. And if you compare this to, let's say, what consumer security used to be just five, six years ago, very much centered around device protection and family rules or parental controls, we're way further now than where we used to be. Lots of potential in the market for value creation. Now in terms of, I talked about scam protection. So here are some of the capabilities that we have now introduced at the end of June. So shopping protection on both mobile and desktop when you enter a site. we give guidance to a user if it's good to continue or if it's a site which is a cause for concern, that maybe not a good idea to proceed. So that's now available on Android, iOS, and desktops. Banking protection, the same. It creates a secure tunnel. No man-in-the-middle attacks possible in the device while you're banking. Native browsing protection. So when you are using either Safari or Chrome, anything and everything that you do with the browser, we are looking after you. So if you're entering bad sites, clicking on bad links will keep you covered. So these are browser plugins natively. Wi-Fi protection, if you are connecting in a public place to a Wi-Fi, now we support iOS and Android devices and on roadmap desktops, but mobile support is available already. So when you are connecting to a potentially risky Wi-Fi network, we notify you and recommend that you stay on the mobile network. And finally, SMS scan protection based on our AI engine will be available at the turn of September and October, both for iOS and Android. Then if capabilities is one side where we have added new value for consumers and partners alike. The other area where we've done a lot of work already is the design of the service. So roughly two and a half years ago, two years ago, we were realizing how difficult consumer security is to comprehend for end users. So what we have wanted to do is to provide elegant small signals in your digital moments while you're shopping, banking, messaging, and so forth, that the service is doing something meaningful for you and keeping you secure. So if you check the little shopping basket signs on the two screens on the right. Those are examples of the kinds of things that we are now doing. The same applies when you're browsing. It's showing every single time when you're browsing if a site is good. If you are Googling sites, it's showing you already in the Google search which ones are to be trusted, which ones not. So this is the way how we are weaving together, in a way, security into the digital moments that people are living. No need to go into a security product to know if you're secure. You will see it all the time and this, we believe, will increase the perception of value for users. But that's all from me. And I would now like to hand over to Sari to go through financials with regards to the first half of the year.

Thank you. Good to see all of you. Let's dig a little bit deeper into the financials. Of course, Timo already mentioned many of these topics, but highlighting a few points. Looking at the revenue, so again, just reminding, last year we had Lookout Life during the quarter for one month, and now it's all three months. So this is of course explaining most of the growth and nicely then from next quarter onwards the numbers will be more or less comparable. Organic growth was 1.9% and currency neutral a little bit then higher as USD and Japan Yen where we had the FX rates against us. But despite of that, so Japan is a nicely growing market, not only thanks to the acquisition, but also organically. So there is good growth. In America, it's very much explained by the acquisition. Then you see here the Europe outside the Nordics. There you see very sort of flat numbers, and this is lower than you saw in Q1. Actually, we had a mistake in Q1, and Europe looked better than it is, so there was a mistake between Americas and Europe, and that has been corrected here in the year-to-date numbers. So Timo already talked about the positive things with good subscriber number development and average ARPU, which is positive in all regions. But then there are the negative ones where we have some problematic customers, and that's especially hitting this Europe basket. So good things in all regions, but the negative things very much concentrated to Europe. And we've mentioned UK and Germany as examples of these countries where we have declining customers. Then on the direct channel, so there the organic growth remained flat, but there, as we've said already for a couple of quarters, the underlying billings development is positive. So now we are just waiting for it to turn into showing also the revenue numbers on the positive side. But the focus continues to be on retention. We've mentioned that we are not doing active marketing there, no paid acquisition, and that's why the new sales are declining. And that's also, it's the same story on the Lookout Life side, so there even the billings is negative on the Lookout Life side. And in this picture, you see the share of Lookout Life. Maybe highlighting on the direct channel picture there, it seems like the Lookout Life part is increasing, and that's related to this... fair value adjustment that we are doing. So now the deferred revenue that came during the acquisition, it's declining every month. And now as it's more than a year ago that the acquisition happened, now it should be all in our organic base from now onward. So there this... feature that has increased revenue from there, so that's disappearing. So now it will be sort of more flat onwards, and again, comparable comparison numbers from next quarter onwards. Then in deferred revenue, you see a decline. It's since the last quarter end. And there is now a mixed picture. So on direct business side, it is growing. We have the growing billings during the quarter. And then on the other hand, so in the partner business, we have not had any bigger lump sum payments or invoices. So that share, the black part in the pie chart, that has been declining. And a little bit to explain this, we added here, this is now not a quarterly slide, but more of an educational slide. And as this picture has changed a little bit since the acquisition, so The bulk of the business is the lowest bar in this chart, so the monthly subscriber-based partner business, where billings and revenue basically are the same number. And this is the bulk of the business and no deferred revenue involved. generated from there. Then the second biggest bulk is our direct business and also the retail business very much works in the same way. So we get the prepayment and that is the revenues recognized over the period of that prepayment. So most of the deferred revenue comes from that area. Then what is new and big with now the Tier 1 business and since Lookout Live, so there are some of these non-recurring engineering costs. When we start the project, the customer is compensating for how we build up the services. And it can be a significant lump sum that we are then recognizing over the whole contract period. And now, for example, we've said that this new Tier 1 partner that was announced in March, that it has supported our revenue. So it is this type of payment that is there. So it is a fixed amount, basically, you see in every month. And then the bigger growth starts in the form of the monthly subscriber-based invoicing, which happens then when the business ramp-up starts. We've had these startup fees also earlier in our, like, the old F-Secure, legacy F-Secure business, but they are typically small, and they don't sort of have an impact on this picture, and they are actually recognized immediately. So it's only those cases which are, like, several hundreds of thousands or even millions that generate the deferred revenue. Then there are some cases also when it can be an annual invoicing or it can be an annual maintenance fee or something like that, that also is then recognized over a year. And these two middle parts here in the picture are like fairly small from the business point of view, but can have an impact on the deferred revenue. And that also explains why on the previous picture, why the partner part of the deferred revenue declined. So this was just to explain the dynamics we have as it has been changing a bit. Coming back to the quarter in opex even if our top line grew Quite significantly so opex is going down and this is Explaining the good result that we have in this quarter. A couple of things to highlight here. Sales and marketing being the biggest part of the cost here. So it's been impacted by this direct business marketing where we really changed the way we are working since the beginning of the year. So that's why this is declining on partner side. No major changes to the marketing approach. And then on the R&D side, so, yes, our activity is continuing on a high level, and all the things that Timo explained about, so we are spending also money on that. But a lot of that is now in the balance sheet. We are not trying to maximize our capex. I think the opposite, but there are things where, for example, this security check... stack from Lookout that we built. So that was a CapEx project. When we are building this total for life, when we are building the solution for the new Tier 1 customer, so that is as well CapEx because they are used over a longer period. And as it's very much our still internal people who are doing this work, so then the OpEx goes down. And in this, at least based on our plans, we believe that the capex numbers sort of peaks during this quarter. And you should expect lower capex numbers during the remaining quarters of this year. So this is a significant reason for the good profitability in this quarter. About the TSAs, now many things are different compared to the same quarter last year, as many of the TSAs finished. So we had very small numbers remaining in admin. It's 0.1 here, but it's sort of close to rounding to zero, actually. And that was finished. That was IT and related to the technology side was finished at the end of May. And both in R&D and cost of revenue, things were finished at the end of May. So there is now a smaller part, which is very similar to what we have with secure that is remaining. And it's sort of not black and white that what is TSA and what is not. We have called it TSA, but very similar to what we have with secure what is remaining here. And now from then this quarter on, it should be very sort of flat numbers in this area. And then we don't need to focus on those anymore. About the profitability, first starting with gross margin, very similar level to Q1, slightly better, and even if the difference is not big, we are quite positive about that. Why the number is lower than it was last year, it's the same explanations that we gave in Q1, so look out life level is lower than the traditional F-Secure business. And we took over from WhitSecure at year end and lost some synergies that we've had in the past. And now we are on our internal learning curve to optimize both royalties and hosting. It's both line items that we are working on and trying to... We've gotten some better deals with our vendors and we are also optimizing the solution so that we can have lower traffic, lower number of units that we are using. So even though the turn is small compared to Q1, we believe that we are on the right track and feel that we've seen the bottom here. And in terms of the EBITDA margin, so just like I said, so it is the lower OPEX levels that are explaining the good quarter, and partly that is related also to the higher CAPEX numbers. But in terms of profitability, very good quarter. And for the first half, maybe otherwise, as this is just adding the two quarters together, not going so much into this, but just highlighting on this geographical split. So here you see the right number for Europe and Americas after the two quarters. So here the Q1 numbers that were wrong between those regions, so has been corrected. Very strong quarter in terms of cash generation. In Q1, it was a little bit lower. Easter had actually a small impact on the last days of the previous quarter, so now we got the Easter money in here, and also otherwise it's been strong. On the other hand, in this quarter, we've also spent money as we had the repayment of debt. and many other payments as well. And we even are using now 5 million of our RCF. It's exactly for these purposes that we have that available, and that's for short-term purposes. As we're hearing in June and July, we have quite many areas where we need the funds, but it's only for short-term. And as this was a very good quarter with cash conversion of over 120%, so this is obviously not sort of a normal level and you see that there are quite many changes between the levels of the quarters. And leverage numbers going down. Of course, our target is to be below that 2.5, so there is still a way to go, but it's the right direction and equity ratio gradually improving after paying the dividends in Q1. Guidance, no changes. We know very well that maybe especially the top line guidance is quite broad. And at some point we will certainly come back to this. But so far the message is that the same guidance remains and we are well between the brackets here. And just for information, of course, you know already when the third quarter is due. So that's 24th of October. But also save the date for the investor day. We are planning to have that on the 20th of November. So at some point there will be, I think, a release about that as well. But that's our current plan. That's all for the presentation and now we are with Timo ready to answer any questions.

Hi, it's Matti Rikkonen Carnegie, couple of questions. Regarding the sales miss with the long-term partners that you said in the partner channel, that sounds like a kind of a bit worrisome turn of events. Is it so that the customers are leaving the partners, so they discontinue the security service, Or are the customers also leaving the partners service? So are they losing kind of total subscribers on the partners?