Pexip Hldg Asa

Good morning, and welcome to this presentation of Pexip's second quarter results. My name is Trond Johansson, and I'm the CEO. Together with me here today at Lysaker, I have our CFO, Øystein Hem, and our Chief Revenue Officer, Osmund Fodstad. Together, we will take you through the highlights of the past quarter and our focus going forward. The standard disclaimers apply as usual. First, for new viewers, a brief overview of Pexip. Pexip was founded in 2012 and currently we operate in 25 countries across the globe. We are a specialist video conferencing and infrastructure company focusing on interoperability and secure and custom meetings. We do software only, delivered as a software or software as a service. Pexip has unique and established partnerships with the leading companies in our industry. We complement and enhance their solutions and do not generally directly compete with them. Our customers are mainly large organizations in both the public and private sectors that have very complex needs when it comes to video collaboration. The financial performance is strong and has been improving over the last quarters. Now to the highlights of the past quarter. Our annual recurring revenues, ARR base, grew with 3.5 million US dollars during the quarter, and this leaves us with an ARR base of $119 million leaving Q2. In the quarter, we had particularly strong performance in our secure and custom business area, and the development here is supported by increased public awareness around the need for secure and sovereign IT solutions, including video communication. We also see that our new interop solution for Zoom rooms continues to do very well in the market. In Q2, we also renewed a partnership agreement with an important partner in connected spaces. And this underlines the importance of interoperability for this key player in the industry. EBITDA came in at 57 million Norwegian kroner and cash flow ended at 32 million for the quarter. If we look at our Q2 performance in the context of the last 12 months, we see that the positive trend from the last quarters continues. Our total ARR continues to grow and is at an all-time high. Year over year, the growth rate is 11%. Our 12-month rolling EBITDA reached 276 million Norwegian kroner, which corresponds to a 23% EBITDA margin. And finally, our free cash flow the last 12 months was 281 million Norwegian kroner. We take this performance as evidence that we are operating in attractive markets with relevant products and a strong market position. Now a bit more detail on the two business areas. Pexip's mission is to make seamless video communication available to all organizations regardless of technology platforms and security requirements. Our two business areas, the first one being Pexip's secure and custom spaces, is about privately hosted video meetings that give complete privacy and data control with the desired level of customization. The second business area, Pexip connected spaces, is about video meeting interoperability by enabling any meeting room to connect to any meeting platform. First, a few words about secure and custom spaces. Here, Pexip provides a video meeting platform that can be used exclusively or alongside, for example, Teams or Zoom in those situations when you need to close the door and have a secure meeting. Our solution includes security features such as tailored user authentication, clear meeting classification labeling, and complete control over what data is stored and where. Integrated chat is also an option. The secure meeting can easily be booked through the Outlook calendar or started through a chat session, exactly the same way as for Teams meetings. I believe that most large organizations will have more than one video meeting solution in the future, and Pexip is very well positioned as the secure meetings alternative. Those organizations that have requirements that fit well with Pexip's value proposition span over a wide range of industries and sectors. Most notably, we see that organizations within defense and national security, as well as government bodies in all shapes and forms, together with healthcare and other regulated industries, constitute the sectors where we see the highest demand. As a result of this, we have increased our focus on meeting the needs of customers in these sectors to ensure that we continue to take market share in what we define as our core customer groups for secure meetings. Osman will show a couple of customer use cases related to defense and healthcare a bit later, but let me share some recent wins we had in Q2 with government organizations that are outside of defense and healthcare. These include secure meetings plus chat integration for a European civil agency, a secure meeting solution for a public prosecutor's office, secure meetings with AI translation for a foreign ministry, secure meetings to a U.S. state corrections agency, and finally, a secure meetings and chat solution for another civilian agency in Europe. In total, these contracts with high-profile government agencies sum up to 1.3 million U.S. dollars in new ARR in the quarter. We see significant momentum in this area, and we are often asked about the key drivers behind the decisions to purchase PECSIP solutions for this customer group. There is no single answer that fits all customers, but in aggregate, we see the following key reasons for selecting PECSIP. A requirement for data sovereignty, control, and compliance. A need for customization capabilities as well as deployment and integration flexibility. a desire for vendor independence and reduced vendor lock-in, and a need for a modern user interface also in secure environments. To give you some more flavor to what we actually deliver to these customers, let me show you a short video describing Pexip Secure Meetings, including an example of an integration with chat. And this solution is a popular replacement of legacy solutions such as Skype for Business or Cisco Meeting Server.

Starting a Pexip secure meeting is easy. You can do it in several ways. You can schedule a meeting using the email plugin, set the optional confidentiality level, and invite your guests. You can also start a secure meeting directly from a message when Pexip is integrated with a supported secure chat platform. Access and authorization levels carry over from the platform you use. Meetings can be direct one-to-one or multi-party. When you're done meeting, The in-meeting chat conversation is stored individually and accessible for the participants. PECSIP integrates securely and seamlessly with a number of self-hosted chat platforms and supports a number of critical shared features. Verification, such as access and permission levels, is seamless and secure and supports, for instance, granular access control. Secured with leading encryption and certifications, Pexip seamlessly integrates with existing infrastructure. You control where to deploy. With Pexip, it's your meeting, your data, your rules.

Now, moving over to connected spaces. This is where Pexip has the vision of connecting any meeting room to any meeting platform. With Pexip's unique technology, interoperability focus, and industry partnerships, we have a market-leading position in this field. The new solutions for Google hardware, Zoom rooms, and Teams rooms are unique to Pexip and are evidence of the leading position we have. Interoperability continues to be highly relevant with several platforms and hardware solutions widely used. As earlier communicated, we are working with both Google and Microsoft to deliver interop for Google Meet hardware and MTRs on Android. The progress is good on both these joint development projects. Also on positive partnership news, we have in the second quarter renewed a long-term commercial agreement with a key partner, adding an additional three years to the existing agreement. This renewal signals the continued importance of interoperability for one of the key players in the industry. The new business model has a higher variable unit price and a lower fixed fee, which is estimated to give Pexip higher revenues and margins over the three years. Short term, it will, however, have a temporary one-off ARR effect of minus $1 million in Q3 this year. Now, let me leave it to Osmund for a sales update.

Thank you, Trond, and good morning, everyone. I'm super happy to announce that we yet again are reporting another strong quarter for Paxip in Secure and Custom with a $2.6 million AR growth to $50.6 million. It represents a 27% growth year-over-year. We are especially strong in defense and see an increased awareness and pipeline for secure solutions globally. In addition, we see great progress within healthcare with several large wins. Let's start with the secure and custom. Pexip delivers secure video meetings for the world's toughest IT environments. Pexip integrates seamlessly with complex, highly regulated networks, tailors the experience to each customer, and still keeps the system simple to run. That's why government, defence and national security agencies choose PEGSIP. Today, I'll share some of the key wins that illustrate this. The first case is the European Ministry of Defence. In this defence organisation, video collaboration is a strategic capability for command and control multi-domain situational awareness, meaning the ability to act coordinated simultaneously, governmental coordination, collaboration, and program delivery. This European Ministry of Defense was looking for a solution that could run sovereign, secure video meetings for their primary NATO command and control environment, interoperable with NATO HQ and 32 member states. So why did the customer choose Pexip? Pexip meets the strict NATO standards known as Federated Mission Networking. Pexip offers flexible deployment, and this is critical for mission readiness, and Pexip runs on any server and any cloud. And finally, Pexip is easy to operate and delivers the rapid scale across domains that this Ministry of Defense requires. Imagine the technology complexity across these member states and their setup, where many collaboration platforms lack the security, compliance and adaptability required. PECSIP is the only one that enables full control over classified conversations. Another major win for us in Q2 that I wanted to highlight is one of the world's largest hospital groups. This healthcare organization was looking to improve both patient care and agent efficiency with video, while maintaining the highest quality across multiple locations and networks. The integrated Pexip and Genesis video solution enabled their contact center to deliver a personalized experience, as well as giving the administrators the visibility and control needed to monitor and maintain every call. So why did Pexip win this deal? As stated earlier and highlighted by Trond, Pexip integrates seamlessly with complex regulated networks and we have the ability to personalize the experiences. And finally, keep the system simple to run. Let's also have a look at the connected spaces. For connected spaces, we ended the quarter at $68.4 million, adding almost a million dollars in AR. Pexip continues to see strong momentum with both Microsoft and the Zoom partnership. where the PEXIT Connect for Zoom Rooms had very good traction in Q2. Pipeline keep on growing for our connected products, and we expect continued traction in 25 and beyond. Let me also share a major win within connected spaces from Q2. A world leading consulting firm needed seamless interoperability and a consistent experience across meeting rooms and technologies. They refused having a walled garden approach and require the freedom for consultants to join any client meeting on any platform. Pexip Connect for Zoom Rooms delivers a fully supported enterprise-grade solution with end-to-end interoperability and a consistent one-touch join experience. The outcome? Platform freedom without vendor lock-in, consistent room experience across sites, reliable high-quality meetings backed by Pexip support. all enabling their consultants to simply just meet. As the leader in enterprise interoperability, Pexip provides a through any to any connectivity and the reliability global firms depend on. And Pexip is the only one that can do that across any platform or any technology. And with that, I will hand it over to Øystein for the details on the financials.

Thank you, Osmond. Let me start off with our ARR development. As mentioned, we grew 11% in Q2, with most of the growth coming from secure and custom. The split of ARR across industries and regions is similar as the previous quarter, with government and healthcare adding the most in Q2, with the growth being fairly evenly split across Europe and US. In terms of net retention and new sales, Connected Spaces saw an increase of $900,000. This is somewhat better than in Q2 of 2024, with improved churn and improved net upsell. Secure and Custom had another very strong quarter, growing $2.7 million and maintaining the annual growth at 27%. Q2 was strong last year as well. And year on year, we had improvements of $100,000 to $300,000 across new sales, net upsell, and churn, adding up to an improvement of $700,000 compared to Q2 of last year. As a consequence of the strong growth, Secure and Custom has increased its share of the total ARR from 37% a year ago to 42% now. This is a positive development, as Secure and Custom has the best net retention of the two business areas. In terms of the P&L, revenues grew 6% year on year compared to the ARR growth of 11%. This is mostly due to timing effects of revenue recognition across Q1 and Q2. And year to date, revenues are up 13%. This is also why the growth this quarter is mostly from software as a service. The NOC USD exchange rate is down compared to Q1. However, compared to Q2 of last year, currency effects are not very significant with regards to revenues. EBITDA continues to grow and is up 21 million NOC compared to the revenue increase of 16 million NOC. This is due to a significantly improved cost of goods sold due to received one-time rebates on cloud compute in Q2. This has helped us expand our profitability significantly this quarter as well, which came in at 20% EBITDA margin, up from 14% a year ago, and is now at 23% on a 12-month basis. This is a testament to a strong underlying business model, as double-digit growth together with a stable cost base has a tremendous impact on profitability. In terms of cost, we continue to maintain a stable cost base by driving for efficiencies in some areas while also expanding in others. Salary expenses are stable year on year with a reduction in cash paid salary of around 5 million NOC. And this was balanced out by an increase in share based expenses as accruals for social security costs increased due to the share price increase during the quarter. Other OPEX continues to be stable and is up 1 million NOC compared to 2024. Looking at cash flow, Q2 had a free cash flow of 32 million NOC compared to 68 million NOC last year. This is due to working capital normalization following a very strong Q1. And in the first half, free cash flow is 253 million compared to 168 million the first half of last year. In Q2, we also distributed a total of 318 million back to shareholders through the dividend and our share buyback program. The share buyback program was completed earlier in August, and combined, we have year-to-date returned close to 360 million NOC so far this year. We left Q2 with a very solid cash position of 544 million Norwegian kroner. So to summarize, revenues are up $16 million, gross profit is up $24 million, and EBITDA is up $23 million. And it's now a 20% margin for the quarter. Depreciation is also $8 million better than in Q2 of last year, as a result of completion of depreciation of some intangible assets. And the current level is pretty in line with our running capex and lease expenses. Net financials is also 11 million better than last year from better foreign exchange differences compared to Q2 of last year. In total, we improved our profit before tax, which came in at 56 million NOC, up 44 million from Q2 of last year. With that, I give it back to Tom.

Thank you, Øystein. Well, now to Outlook. As described earlier, we maintain a positive market outlook based on the key trends we see in our markets and the unique technology, strong market position and solid industry partnerships that we have. Our expectation is that we will continue the positive ARR trend we have seen over the last quarters and end Q3 with an ARR in the range of 120 to 123 million US dollars, compared to the 119.0 we had leaving Q2. Included here is the temporary negative ARR effect of the new pricing in the renewed partnership model. As mentioned earlier, this new pricing is positive for PECSIP's revenues and margins over the contract term. As demonstrated this quarter, we are also tracking well towards our near-term targets of consistently delivering above 10% ARR growth and above 20% EBITDA margin. Longer term, we have an ambition to deliver rule of 40 performance across ARR growth and EBITDA margin. Last 12 months, we are at 34 on this parameter. Finally, before we go to Q&A, we will have our Q3 presentation here on November 7th. Now, Q&A.

Thanks, Lautro. As normal, we'll start with questions from the analysts that are with us on the call. I believe we have Jørgen Weidemann from Pareto on. Jørgen, do you have any questions for us?

Yes, thank you so much for taking my question. And also, first of all, congratulations on another good quarter. So my first question, can you shed some light on the way you account for variable price commitments in your ARR? especially with relation to the connected space contract that you've now changed slightly. And if you don't account for them at all in your era, can you tell us something about the share of variable payments that you have in your current contracts and how we should think about that going forward?

Typically, we don't have variable pricing contracts. They are variable in that they scale with the number of licenses that are bought. The typical model for us will be that the price per license will be fixed for the entire contract period, which is typically one to three years. In the specific contract that we mentioned now with the partner, we had a somewhat different model with a large contract fixed fee of about a million a year. On top of that, you had a variable price. In the new model, you have just a higher variable price, but no fixed fee commitment. Did that help, or were there other type of variables? I was just wondering how we should think about it.

But if you say that the whole contract was a special one, and the ones we usually account for is the ones we should continue to account for, then that's very clear.

when the previous contract basically had built in a certain uncertainty around volumes and the price levels. And now after having run that contract for three years, we see that the volumes are coming up and sort of the... the pricing in the market sort of allows for a higher variable price and when this is then more positive also for pexip on a revenue and margin basis that's that's how we sort of that's the way we kind of ended up renegotiating that agreement for the next three years so just to clarify then if the contract you're switching to now is closer to the ones that you

Usually, yeah. Why would it reduce DRR if it's still going to be the same coming in? That's the way you usually account for it.

The reason for that is that we need to build up the volume on the new contract. And so when you have a price per unit which is higher, it does require us to sell units into that program to retain that revenue. That being said, based on the previous three years, we're very confident that that will happen over the foreseeable future.

Okay, great. That makes a lot of sense. And then my second question is on connected spaces, which continues to be a little bit subdued in growth with 2% year over year. But I assume that's mainly from the switch between SIP and service-attached endpoints. At the same time, you see a significant traction on the Zoom native product, now at 4 million ARR. Is it fair to say that the Zoom product alone is enough to counter the effects in the switch, and that we should expect a higher growth as the other products become available for sale?

I think that is certainly our ambition, to be able to expand our growth in connected spaces as we, in particular, become more relevant to Microsoft Teams customers with covering both Microsoft Teams Rooms on Windows, which we do today, but adding Microsoft Teams Rooms on Android, which we currently are in development of.

Okay, so there's no reason why connected spaces shouldn't return to 5% or 10% growth in the next two years when you have those products.

We only provide guidance, to be fair, on the overall. If you see this quarter, we added close to a million dollars in ARR for connected spaces. If you take that pace, you're already mid-single digits. I think it's fair, but we don't give concrete guidance for specific product areas.

Okay, that's fair. Thank you so much.

Thanks a lot, Jørgen. Then I believe we have Kristoffer from D&B on the call as well.

Yeah, Greg, can you hear me?

Yes, we can.

Cool. Yeah, so could you just, you know, kind of reiterate how to think about that change in contract and how it kind of affects the kind of sets up the sequential change in ARR into Q3?

Yes. The previous contract had a fixed fee and a variable fee for the units that were sold onto that contract over the three-year period. When we now move into the new contract, that has no fixed fee, which is the million dollars that we feel the effect of immediately, but a significantly higher per unit volume price. And so as we sell into that contract over the next quarters and years, we expect to recoup that initial loss by having higher ARR. And that is based on the sales volumes that we have seen over the past three years.

Can you just talk a bit about the product of the counterparty there, how they use it, and why their current use and base wouldn't already just roll over into this new one and drive an equivalent or higher ARR instantly?

I can't go into details around that contract, but there's a substantial customer base that we have not touched yet with this product. It is within the connected spaces and predominantly connected spaces with Connect for Teams standard, which is our main product in this area.

I just got the sense, like you said on the previous question, that You know, thinking about connected spaces going forward, you know, it's added almost a million of DAR in Q2, and it seems like you're kind of feeling it will be the same in Q3. But if you have like a million headwind, is it like a gross add of two, and then you kind of take out one to arrive at that one million for Q3, or...?

I did not intend to give concrete guidance for Q3 specifically, but if you zoom out on a yearly basis or even in the next two, three years, that we both have shown and have the current capacity to have solid growth in connected spaces, it's certainly within our expectations.

Just to put a million dollars into some context, we have single contracts that we enter into in connected spaces that could be a million dollars or more. The million dollars is, in my view, not really very significant in this context. What is significant is the fact that this very key player in the industry has entered into a three-year agreement with PECSIP that really underlines the importance of the products and solutions we have and how important that is for this key partner to continue to drive development in their business.

Okay, that's helpful. And then just a final quick one from us. You know, if you just do some back of the envelope here and look at the kind of the midpoint of your guidance at 121, 122, and assume you have that 1 million sequential headwind in connected space, it kind of seems to indicate that you are expecting a material step up in growth, both in terms of DAR and year-to-year growth in ARR and secure custom for the current quarter. Is that kind of the way you're thinking about it? And if yes, what is kind of driving that? acceleration in Q3 for securing customers? Is it like you guys pushing more or is it more like a pull from customers accelerating for some reason? That would be helpful.

I can try to answer that. Just to make that very clear, the change in contract and pricing model is already taken into account in the forecast that we are giving you for the third quarter. Whether the growth, which means that if you want to correct for that or not in your estimates, you can do that, but in the 120-123, that is already taken into account. Whether growth in the third quarter will mostly come from secure and custom, as it has done over the past last couple of quarters, or more from connected spaces, I mean, we're not guiding on that. So we expect both areas to grow, and we have seen that they sort of, it varies a bit over time what grows the most, but what we have seen and continue to see is a very strong momentum in the secure and custom, driven by the current geopolitical situation, the awareness around data control, sovereignty, and the need for IT systems as alternatives to the major global SaaS solutions that are out there.

I mean, we do see that underlying pipeline in both connected and secure continuous, right, which I think is the most important, even with this change of contract. So, yeah.

I think we're talking a bit past each other, but I think we're on the same page. So thanks a lot.

I'll jump in the back of the queue. Thanks. That was good stuff. Then we will move on to Markus from SCB. Markus, can you hear us?

yes thank you so just to finish off without that new new contract or the new partnership agreement when do you expect break even compared with with the current current model that's the first one

I mean, that could be anything from a quarter to half a year to a year to that. It's just relatively short. Let's let's not give any more. That will be more guessing than anything else. If we look at our pipeline, we assume it will not be too long into the future.

That's clear. And then secondly, on Teams rooms for Android, when do you expect to see the first revenues coming in or ARR coming in from that? And when do you expect that to launch commercially?

To take the second part of that question first, the launch is dependent on Microsoft launching support for that on the Teams room for Android. We are not really in control of that. It's currently listed at Q4 roadmap, but timing there is still unconfirmed. We don't really expect revenues from that to be significant in 2025, but we do think that will be a contributor to growth for us in 2026.

Thank you. And then thirdly, on secure meetings, you're talking here about a strong momentum in the conversations. Of course, the awareness is increasing and then you have a good pipeline. If you compare that to your current booking level and contracts signed, do you expect this level of bookings to continue based on that pipeline or do you actually see the bookings pick up? as some of the conversations that you have now materialized.

The momentum is certainly not reduced. It's more kind of being increased. We are introduced to more and more situations and the use cases where we see that we have relevant solutions. How quickly this pipeline converts when we talk about the type of customers we talk about here, the sales cycles are relatively long. Yes. So in the secure area, as we talk about government bodies, we talk about the defense organizations and so on. So I think we are quite optimistic in the development areas. We're trying to signal through the presentation.

Thank you. And then the final for me is on the cost base and going out of 2025, I think you previously mentioned Assume that you will have around 300 employees. That's a run rate cost base. Have you made any changes to those forecasts or the resources that you need to execute on the pipeline going forward?

No, that's roughly the plan. I think we've said on previous calls as well that we expect to be around 300 employees at the end of the year. I think that is still a fair estimate. We see quite a bit of opportunities, as you would expect with a 27% growth within Secure and Custom. For us to reinvest, to continue to drive that growth, I think is prudent.

Very clear. Thank you.

Thank you. Let me check my notes. Erstein from ABG, are you with us on the call?

Yes, good morning. Congrats on the strong report again. I think some of my questions have already been answered, but I had especially one on secure and custom. I was wondering, given that this is such a big mega trend that you can foresee for several years going forward, that customers want the freedom of deployment to be able to host things at their own servers or at least in a sovereign cloud. Do you see any of your existing competitors or new entrants looking into ways of providing customers that either on-prem solutions or sovereign cloud solutions?

I think the sovereign clouds are being built by several companies around Europe that could also be some of the large hyperscalers like Google or Microsoft building sovereign solutions. And this is actually very positive also for Pexip because to be able to deploy Pexip in these sovereign clouds is something that we are working with some of these large hyperscalers to deliver. And that is something that's in demand from the market. in terms of competitors providing video collaboration tools tailored at deployment in these architectures and environments we haven't seen any developments there from any of the major players or new players for that matter very interesting thank you and uh on on on connected spaces we're of course still waiting for the launch of of

Connect for Google Meet and Teams on Android. I think from previous conversations, you have indicated launch around Q4. Is that right? And if so, do you have a pipeline built so that when these products are launched, we should expect ARR growth from these companies to start already around launch? Or is it like after launch, you need to build the pipelines, then that's like a six-month lead time or so before we can start to actually see new ARR coming in from these products?

I think in terms of timing of launch, that is still sort of what has been said publicly from those players. But again, that's sort of timing that we're not really in control of. But no new updates for me in terms of timing. With regards to pipeline, it's certainly a conversation we're having with customers today. But then large enterprise customers typically want to see things and test things and pilot it themselves before buying. So for there to be an immediate effect the next day is probably a bit optimistic. So somewhere in between.

We did see that for Connect for Zoom. We got faster results than we have on Securing Custom. It's a longer sales cycle. So we're optimistic about it. We're building pipeline as we speak, Øystein. But again, to Øystein's point, you won't see an immediate effect on the day it's being launched. And again, we're being dependent on Google and Microsoft for getting this out in the markets. Thank you very much.

And last question is, you still have a very strong balance sheet. Is still the primary use of that balance sheet to be paid out to shareholders in terms of dividends and buybacks? Or do you look at other types of uses for this cash, either M&A or do you see other ways of deploying that balance sheet?

It's a constant discussion that we're having in the board and in the management team, of course. No immediate plans of large-scale M&A, looking as always and as we have been doing for a period, that sort of alternatives for investing into things that would accelerate growth could be acquisitions, but currently there are no short-term plans to do anything like that.

Very clear. Thank you very much.

Thanks a lot, Christian. Lisa from Arctic, are you with us? Or Christian? Oh, sorry. Lisa, can you hear me? Christian? Okay, then we will move on. Do we have any other questions on the call? No? Then I will check mail to see if there are any questions there. I have a question here from Arctic in the mail. Defense growth of less than $500,000 in Q2, down from one million in Q1. Would you say this is just related to some timing or facing, or do you see that vertical slowing down a bit forward after a strong year or two?

That's seasonality. I wouldn't even call it seasonality. It's just the different quarter to quarter. I wouldn't put basically anything into it. That's just the way it is. Again, as we explained, we have long sales cycles. The pipeline is good. Again, defense is strong for us and we have good momentum.

It's still basically the fastest growing segment if we look at it in a slightly bigger context.

We also had a question that you added some FTEs quarter-on-quarter. Just wondering if this is reflecting somewhat higher growth, or if you still expect a flattish headcount year-on-year by year-end? I think, as I said earlier, we're expecting a headcount of around 300 at the end of the year, which has been the plan from the beginning. Then it will fluctuate a bit from quarter to quarter. With that, those are the questions that we have. Thanks a lot for the attention, and we'll see you soon.

Thank you.