F Secure Oyj

Welcome everybody to F-Secure's quarter three results session. Good to have you all with us online as well as here in the room, physically in Helsinki, Finland. Now, when we were thinking about the right header for our quarter three results release, we were thinking about building the fundamentals for growth. We've been working on that for quite some time. We've had that header for a few times, and we thought of other transformative things that we've been busy with in the last months. And we realized that we made tons of concrete progress on the front of AI-powered business. And we decided that that's the right header for this time. I'll get back to that later. But now let's dig into the results of quarter three. So first of all, in line with what we indicated in July, we were looking for low single digit growth in the business in currency neutral terms, and that's precisely what we got. So we were developing the business slower than what we expected in the beginning of the year, but in line with what we indicated earlier in quarter three. The weaker US dollar, continued weakening, unfortunately, during quarter three. So that didn't give us any kind of, let's say, wind behind our back. But in currency neutral terms is what matters most. how we did. Now, we did regular work in terms of focusing on our strategy execution, making sure that our capability and maturity to serve tier one partners win business, deliver services, and produce the services in operation are strengthened, and we continue that work on all fronts in technology, services, product. In terms of operational excellence, we've been building new capabilities, for instance, in terms of service. We've started introducing AI-powered capabilities and agentic AI into our repertoire. And then in commercial performance, we have several different initiatives ongoing to increase our capabilities and improve and develop our capabilities to service all the different segments of customers and partners that we're working with. Now, with regards to commercial activity towards Tier 1s, in a way, two fronts. One is that we signed a couple of new deals, both extensions to our existing partnerships. One was in a groundbreaking area, which is very much on top of everybody's agendas right now, deepfake detection. and deepfakes now reflecting deepfake videos, deepfake images and so forth. And the difficult part in all of this is not only to identify deepfakes, but to understand which of these deepfakes actually have a malicious intent. So it is the combination of the two deepfake and malicious intent that we need to be identifying. And this is the deal that we signed now with a major embedded partner in Asia and which we are delivering in the next months and then which will go live early part of next year. The second tier one deal that we did as an extension was that tier one insurance player is integrating through embedded capabilities some of our consumer security SDKs and cloud APIs into their own app. And this is precisely the kind of development we want to see. This will lower once again the adoption threshold for these insurance companies, customers to adopt our service as they don't need a separate app. They don't need to establish new credentials. They don't need to learn how to use a new application. It is an application they hopefully already have. So that's a good development, and we're looking forward to that one being in a way a reference, hopefully a very successful one at that, of a non-communication service provider integrating our capabilities into their app, and thus, once again, us being able to service a much wider group of consumers out there. Now, I will talk more about the next bullet point, which is about the AI transformation. I'll get back to that a few slides from now. And finally, something I have reiterated together with our CFOs, Aris Omerkalli, a few times in the past quarterly results, is that we continue, after these extensions, we still continue to have a very strong pipeline of further tier one deals that we're actively working on. Then coming back to our strategic 2025 priorities that we have referred to earlier. So there are three things. One is that we are definitely looking at growth. especially through tier one partnerships. And the list of names that you can see on this slide on the left are the kinds of targets that we want to go after and serve. Some of them we are serving already. Some of them have signed a deal with us and we're in the process of implementing services for them. And some of them are yet to be joining the F-Secure team. So that's the focus. I'll get back to what kind of progress we've made. I referred to already some of those. In the middle, we absolutely want to be the leaders in the scan protection market. And lo and behold, once again, we have some good proof that we're making progress on that front, getting recognition for our efforts. And finally, becoming a data and AI powered business. We made lots and lots of progress in that front during 2025. I'll get back to those things. So these are the priorities that we will be measuring our success against. Now, with regards to the tier one partnerships, I already mentioned the extensions with an extended, sorry, an existing partner in Asia and another one with an insurance company. In addition to that, we've also signed up a new deal in Asia with a partner that is at the top of that country's top three. as a service provider. We also extended with one of our US partners to also cover scam protection. So they have been a long time partner with Total, but now they also expanded into scam protection. And also a Nordic banking partner, a big one at that, is expanding their Total offering with scam protection. So if you look at these kind of things that we're actually signing up in our business be it tier ones or major partners they all have one thing in common it is scam protection that is actually having great traction in the market and we have an offering both on embedded security side as well as on total side and that's something where we expect to see clear growth also going forward in the coming quarters and years. It is the right place at the right time for us. With regards to How did we do in scam protection? Then we were named Cybersecurity Solution of the Year for telecommunications by Cybersecurity Breakthrough Awards just a week or two ago, which is once again recognition of our efforts, especially as mentioned here, state-of-the-art anti-scam technology, building trust and providing value for hundreds of millions of end users who are behind the partners that we are serving. So that's a great award that we have won and a great recognition of our efforts on this front and being at the forefront of scam protection rollout to the market out there. Secondly, in 2024, we launched our scam protection module as part of Total. Also, we have provided to the market a wide range of embedded security capabilities that have to do with scam protection, and we have continued with Avengers in 2025. So not only have we build further the efficacy of the things that we did in 2024, because the scam market is evolving practically every single hour, every single day. So what we launched back then, we can't just, let's say, rest on our laurels and let that be. We need to be developing it further all the time. So active development has gone on, for instance, in protecting people from scam related, sorry, SMS related scams. But we've also then introduced new capabilities, such as instant messaging scams on WhatsApp or Facebook Messenger, which are very, very common. I'm relatively certain that all of you on this stream have seen some of these WhatsApp and or Facebook Messenger scams in the past couple of years personally. Also, the new area for us is now detection of deepfake scams, be they videos, phone calls or images. We are still yet to launch new capabilities in 2025. I would say that there is no lack of potential areas of scam that we still need to be developing further. Also in terms of, let's say, I already said a right time in the right place, I would say that this digital perception reality gap report that we came out with roughly two to three weeks ago just highlights the need for scan protection capabilities. 74% of consumers out there, based on our most recent survey, are confident that they can recognize a scam when they bump into one. Yet 43% of these people have still fallen for scams. So there is a clear, in a way, confidence that consumers have, but seems like it's relatively unfounded. So we have to be able to bring scam protection capabilities to people who don't believe in their capabilities to spot a scam, and the ones who do believe so, and make sure that people have better protection from the get-go. And one good way to do so is embedded security within the telco, financial and digital services sectors. So the time for embedding these capabilities is more necessary than ever to keep the overly confident consumers safe from scams. And finally, getting into the AI transformation and the kind of progress we've made on that front. So on one hand, we've taken into use very widely AI tools, large language models, generative AI tools in the company, in our day-to-day operations, how we manage our personal work in teams. and in business units and in our functional units. So this is not just something that people are doing as a learning exercise. We are looking at quality, customer service, documentation, secure coding, code generation, testing, sales functions and so forth. It's coming everywhere. I won't be able to provide you with a precise number of in a way, percentage of the lines of code that we're now generating using AI powered tools. But I can assure you that compared to our peer group here in our home country, Finland, we are at a very high level of application, very high level of application of AI powered tools. At the same time, we need to be extra careful with secure coding practices, making sure that we have clear frameworks for how do we protect our customers and end customers private data while we're using generative AI. So we've paid a lot of attention to make sure that privacy is also covered. as well as it has always been, so that we don't compromise any data because of the use of AI-powered tools. So even though we've been careful on this front, we've been able to make a lot of progress. Now, a couple of things I want to highlight. that are going to be visible for our partners and our users out there are two new initiatives in a way you could call them greenfield initiatives that build on the capabilities we already have, for instance, as SDKs and cloud APIs. One is Horizon, which we launched at our global partner event in May, which is a AI-powered partner business platform, which helps us onboard and support the growth of the business of our partners en masse. So we hope to be able to serve not 150 or 200, but 1,000 or 10,000 partners in a cost-efficient manner where the service level that they get is actually better than what we can provide with our own staff being always heavily involved in driving success of our partners, marketing, sales, enablement type of things. So we're building a completely AI powered system on the internet, which allows our partners to grow their business with minimum, in a way, human interruption or contribution. building on our best practices of the worldwide community of partners we have. So that's one, that's Horizon. Then Halo is a new end customer service. It's a mobile first scam protection app that we're building. That also is something which is completely AI powered, not only in the way that the service operates. Just like Horizon, they are both using the latest best practices in processes, practices, tooling that AI now provides us. So the development cycles are fast, yet quality documentation, secure coding practices are followed to the last dotting of the i and crossing of the t's. So these are crucial aspects in developing our business, not only to produce completely new kind of AI powered results, but also apply AI powered working processes and methods and tooling. It's turned out to be very, very positive experience so far. So that's it for me. I will get back on the stage together with Sari, our CFO in a moment, but now it's time for her to go through the financials.

Thanks, Timo. Okay, so let's look at the financials for this quarter. If we start with our partner channel, partner business. So here our revenue grew by 0.4%, which is clearly lower than our ambition, but also impacted by the FX rates. And we split this development into the embedded services and security suite. And as you know, embedded is the side that we are now really focusing on, and there the growth is above 10%. So that's a nice number. And that has been driven by Japan. It's a super good development that we have in Japan. But need to say that US is the biggest part of that embedded number. In Japan, the growth number is clearly tens of percentages, as most of that number comes from the US. And in the US, there we have both security suite and embedded, and there the embedded numbers, that development has been more positive than the security suite, where where we had this one customer with changed pricing structure and also some legacy customers who have not converted into the new total era and thus are lagging behind. And there on security suite then there are many positive things like total conversion continues well and ARPU is growing and this you can see then especially in the Nordics numbers where Sweden and Finland are really performing well and it's related to the total conversion. DAH region is also showing very nice signs, except for Germany, where we have already for several quarters said that there is one customer that is churning quite rapidly, and it continues to have an impact. There are also some other, let's say, legacy customers who have not converted to Total, who are also then declining, but this German is the biggest case. If you look at the direct business, so declining 5.9%, and this continues to the trend that we've seen in the past, so good development with retention rate of existing customers and good output development, but then we don't have good success with the new sales because we are not investing in customer acquisition. And that is per our strategy. And actually these numbers are quite positive compared to our sort of worst expectations. And looking at the total, so currency neutral change is plus 1.3%. That is in this ballpark of our low single-digit growth. But of course, our ambition has been higher than this. And you see in this rest of the world, 17.4%. So that is definitely driven by Japan, which is now... the stellar market that we have. In North America, currency neutral is flattish, and that's a mixed bag where we have some positives, but also negatives. So like we've had in the header that it's a mixed bag. And rest of Europe, we talked already about Germany, which is the key one, but also some other countries where we have declining customers. And Nordics is where you see the success of total conversion, where ARPU is growing and in general it's developing very well and continues the good trend that we've seen also during previous quarters. Looking at the cost side, so of course here we are balancing with investing in the future growth, but still ensuring that the profitability is in place today. So you see some changes in the cost structures overall. We are on the level of last year, but you see that sales and marketing cost is proportionally lower than before. And their retail channel is an area where we have invested less than than previously and spending less marketing in that area. And that's a key driver for the changes. Also, last winter, there were some structural changes, which also are having an impact. And then on the other hand, you see that R&D investment is going up. And the overall activity is a little bit higher than previously. And in this quarter, we had had less capitalization, so that's why you see a clearly higher number in the P&L in R&D. In terms of profitability, if we first look at gross margin, now at 83.9%, it is lower than we've seen before. And it's partly driven by the growth in embedded, which we have said that has lower profitability than security suite. But partly it is also a result of the lower volumes where we have with our vendors, we have contracts where higher volumes would be beneficial. So here definitely growth will then help with that number. So that's slightly disappointing from our point of view. Overall profitability then with adjusted EBITDA being at 13.3 million or 37%. So of course, 37% is clearly lower than the 40.3 from last year. But last year was exceptionally good. In general, we always have good profitability in Q3 because revenue is fairly stable, but costs are always lower. There's just less activity in Q3. So I would say this 37 is a good number, and last year was just exceptionally good. And if we look at the year-to-date development, currency neutral growth 1.2%. So as said before, we want to be higher and expectations are higher for Q4. So even if we are on lower level than originally, so still this applies that we have expectations for the second half. And in terms of EBITDA, so now year to date 34.8%, the full year guidance is 32 to 35%. We are close to the upper range, but now, of course, good Q3 helped with that and should not expect to see 37 in Q4. So I would say well within the range we have guided previously. Cash flow was on a good level. Cash conversion 78%. It's sort of an average. average number. So no drama here. It's a good number and we are happy with that and sort of demonstrates our normal performance there. And outlook, no changes here. We continue to expect low single digit currency neutral growth. and profitability 32 to 35 percent. And of course here then the effects can have an impact on this, because of course if lower effects or weaker USD has an impact on the reported growth, which partly flows through to the result. But I don't see any issues with the guidance, so this is what we are working towards. This is the story, very simple from financials point of view this quarter. And now with Timo, we are happy to answer any questions that there are.

All right, good afternoon. It's Matti Riikonen, DAB Carnegie. A couple of questions. You mentioned in the security suite that there was a US customer who had lower prices. Is that somehow dependent on the volumes that the customer has or step down in price if the volume increases? Or is that just a new price negotiation?