Yubico AB

everybody, or actually it's good evening where Camilla and I are at. We're in California following today's board meeting in Yubico and we're excited to share some background and then dive into the results from the interim report for the third quarter. I know that we have several participants that have been listening in to presentations earlier, but I'd like to give just a quick overview of Yubico as a company before we dive into the specifics for the quarter. And just as a quick reminder, Yubico is a leader in the multi-factor authentication industry. Our key product is the YubiKey. And we've been growing over the past 15 years and on a rolling 12 month basis, our annual turnover is about 1.8 billion Swedish krona. We're about 430 employees. We're we have a very nice set of customers that I'll return to shortly. And we work primarily with the world's largest companies and organizations. Some 30% of the fortune 500 companies are already our customers to a to varying degrees, some just initial deployments, whereas others use it pretty much wall-to-wall with their organizations. As I mentioned, we're a hardware-based company, but because of the big software component of our offering, we are able to maintain very healthy margins and we continue to deliver that in this quarter, more than 86% margins. Since start, we've deployed more than 22, I think it's about 23 million UV keys And the other number which is significant to mention that we deployed some 23 million YubiKeys, but we've had zero account takeovers following a full integration of the YubiKeys among our customers. So we're very proud of that. Flipping then over to the next slide here. As I mentioned, we work with some of the leading brands, this is a subset of the companies that we're working with, and you can see that we started out very strong in the high tech sector that remains our biggest industry vertical but we're seeing an increasing. Jone Peter Reistadler, A range of customers from within several different industries that are now the customers of ours and for growing within the public sector, both in the US and Europe, so we feel that this positions as well. Jone Peter Reistadler, For future growth and the final slide then as a. Jone Peter Reistadler, As an introduction. is that we're fundamentally selling a key. It's the YubiKey, and we've spent a lot of time and investments into ensuring that our key fits into all the relevant locks. On this slide, it's kind of a mouthpiece, but we're talking about the fact that our key fits into most of the relevant locks, which means that our enterprise customer can use our key to access all relevant systems in their operations. It's different types of hardware, software and we've done a lot of integrations over the years, ensuring that we can have both a very secure and easy access for users across the globe. With that as a backdrop, I would want to present a few highlights from the quarter and then Camilla will share more detailed numbers. Start by noticing that this is the first quarterly results that we present. following the completion of the transaction between Eskildura and Ubico and the renaming of the company to Ubico. The picture shown today is just this happened on September 20th, time flies towards the end of the quarter. What we'd like to summarize then is what happened during this quarter and a few milestones then. As I just mentioned, we completed the merger and the new merged entity's name is Ubico. In connection with the merger, there was a placement of shares to a limited set of investors. A lot of that was because several pre-existing Ubico shareholders could not get payment in the form of shares, otherwise we'd have to register with the SEC. So therefore, a placement was made and then there was a number of warrants exercised. So this was an exercise which meant that we played successfully shares for about 340 million with institutional owners. And if you look at the set of shareholders that we have today, After the merger, Bure is the biggest shareholder in Ubico, followed by AMF, and then the founders in Ubico. But we have several institutional and VC owners in the US, including, for instance, Envy and Horowitz. Another thing which was completed during the quarter was that we updated the board, and we added a few members. and one left from the previous board, which means that we feel like we have a good set of competences within the board today, a mixture of US and Swedish board members and seasoned professionals. The final thing I have to highlight was that in connection with the completion of the transaction, we got approval for a long-term incentive program. The rules are that it will get rolled out later this month, Sorry, yeah, this month, but it was approved by shareholders, which means that it will entail a dilution of approximately 0.8% at full usage. Talking a little bit about what we did on the technical side, so I'd highlight three things. There's ongoing development work going on, of course, but one of the important things that didn't have a significant impact short term, and it was announced as late as in October, was a pre-Retch cooperation that we launched together with Okta at their Octane conference in early October. This is another effort to ensure that it's easier. As I mentioned before, our hardware authentication solution is super secure. it's also easy for the user we want to make it easy to deploy to and this is a significant part of that ensuring that as an enterprise rolls out or as an organization rolls out uv keys internally that they can do so and it kind of works out of the box we're starting that cooperation with octa and we see a lot of interest in that another project that i'd like to highlight which will not have an impact on our sales in the short term which we feel but we're still very excited about in terms of long-term development is An initiative initiated by the European Commission, ensuring that there is a digital identity wallet that should cover all member countries. And Yubico has now been included in that project as contributor. And we want to make sure that there is support for Yubikeys and that it's a convenient way for EU citizens to secure their online identity going forward. More to come on that. The project aims at rolling it out to all EU citizens by 2026, but there's a lot of work that needs to happen before that. And finally, in terms of development work, I'd like to highlight what's today still a niche product, which is really protecting secrets stored on servers, our UBHSM hardware security module product. We're launching a new functionality there in November, so it hasn't been launched yet, but we're announcing it in connection with the report. And we feel that this will be a clearly improved offering and will set us up for growth in this market. The HSM market globally is estimated at 18 billion Swedish kronor. Today, this is about one to 2% of our turnover, but we're setting us up for growth within that market. That was a little bit on the technical side. And on the market side, there are a number of trends. And it's encouraging from our perspective to see given the high level of cybersecurity threats that government and financial services company are taking action. More regulation, which may sound as a limiting thing, but I think it's actually makes a lot of sense for there to be more regulation in this market to ensure that users, companies, and citizens are protected. Two initiatives to highlight here is the Securities and Exchange Commission. which are now setting up strict requirements for public US companies on what they need to do in terms of authentication, which is to a large extent mirroring the federal requirements for public organizations. So that's interesting. Another great example is Goldman Sachs, one of the leading banks, as you all know, who are now doubling down on the use of FIDA security keys, where YubiKey is, of course, a leading vendor. Moving then to the numbers and the quarter, the numbers are out in the report. And in terms of net sales or revenue, we saw an increase in the quarter of about 4%. And in local currencies, that was 2%. I'd like to highlight, and this is something that we mentioned in the, as we released the Q2 report, that some of the comparisons in the Q2 report were distorted by the fact that we had an unusually large order in Q2. That meant that the comparable numbers for order bookings were a little skewed in Q2. That order was delivered in Q3 and Q4 2022. So if we had difficult comparables when it came to order bookings in the first half of 23, there's some of that in in q4 so we saw a stronger growth in revenue or net sales during the first half of the year as we deliver this unusually big order in 2022 that meant that it boosted revenue during the second half of the year still growth but just as an explanation for why the growth was perhaps a little lower than some might have expected gross profit we posted a profit i think what we have sorry, for gross profit, we actually posted a very strong number at almost 88%. We're seeing, and to explain a little bit more about that, we're seeing a very solid gross margin on our product, which is based on that we have implemented very cost efficient manufacturing, but there are also some seasonal things there for instance we had strong ecom sales during the quarter that's our highest margin business and also product composition has a small impact on this number but but we're continuing on a very healthy trend there we talk about ebit and i i would want to highlight that one the numbers that are on display here are the adjusted ebit numbers because we had some transaction related costs to the tune of about 94 million swedish krona which meant that if we don't adjust Rebit, we posted a small loss, but those were simply related to the merger. One comment also on the adjusted number, that number does entail one-off cost, which was not really related to transaction, but as we've highlighted in the report, we did a company event and company conference in December, mid-September in Prague, where most of the company's employees attended. So that had a short-term negative impact on profitability of about 20 million when it comes to additional cost during the quarter. Another KPI that we're tracking very closely is our annual recurring revenue, and we'll talk more about that. But that grew compared to last year by about 70 million in Q3 to 55. So one of the things that we track very closely is our bookings numbers. And Q3 22 was more of a normal quarter and compared to that, unlike Q2 and compared to Q3 last year, we saw growth of a little bit more than 19%, close to 20% in local currencies. And it comes from a broad set of customers, two sectors that we would highlight. this quarter that contributed to to growth were telecom companies in the us and the public sector in the us which is kind of natural because the federal fiscal year ends in q3 in the us and then we had so a lot of interest in a lot of demand and orders from the polish markets from both private and government institutions as everyone knows poland is under a lot of security threats including in the cyberspace, and we're very happy to be part of the solution there, supporting our customers in Poland. Talking about subscription bookings, they were at about 58 million, so about 14.5% of the bookings. And again, as a reminder, when you look at the year-to-date numbers, keep in mind that we had an extraordinary order in Q2 2022, but a more normal period. And with that, I think I'll hand it over to you, Camilla, to discuss the other numbers that we presented in the quarterly report.

Thank you. Yes, so as Mattias mentioned, we had a relatively low growth rate this quarter, also the net sales, especially in August, September, and related to the enterprise segment. But we also saw that e-commerce was growing with actually 24% in the quarter. And notably, this quarter is also that we have less impact of currency exchange rates. For the first half year, we had an average of approximately 10% positive effect when translation into Swedish krona. And this quarter, we only have 2.6%. that kind of effect. So that was also affecting the growth numbers, of course. On the ARR side, the ARR increased with 38.2% versus Q3 last year and amounts then to 255 million at the end of this quarter. And thereby we added 12.5 million net new ARR in the quarter and 50.7 million since the start of the year. Looking at the EBIT side and we are now starting to look at the adjusted EBIT as we have introduced just that due to these quite big costs that we had related to the transaction and the merger. We will look into the merger costs later in the presentation. But this is to give you the feeling of how the underlying business is actually going. And so the adjusted EBIT amounted to 19.1 million, and that led to an EBIT margin of 4.7%, which is substantially lower than last year. as you know, and we continue to show a strong gross margin, as Mattias said. Comparing the 87.6 this quarter with H1, we also did better. In H1, we had 86.1%, and basically that relates to the mix in sales channels and products. And the currency is also less impact this quarter, also from profit side. The last year we had positive effect from unrealized currency effects of 28 million, while we in this quarter see a negative impact of 1.7 million. So it's quite a big difference as well. So in total, almost 30 million SEC in difference there. But of course, the biggest impact on the profit level is the lower growth of net sales in the combination with increased run rate of OPEX. And then especially related to employee costs, both the one-time costs related to our all company conference here in September. But we have also been growing with more employees during the last 12 months as well. If you remember, we had not so much growth of people during the first half year, but we also said that we will recruit more during the second half of the year. And so we have also done during the Q3. So we are now 13% more employees this quarter compared to last year, which is also driving the OpEx run rate. Looking at the cash flow and the financial position, you recognize the graph here with our inventory. We had an operating cash flow of minus 19.8 million this quarter compared to minus 9.9 last year. We continue to build up the inventory, not so much this quarter as we did first half year, but anyway, it's still 61.3 million more in this quarter. And this is related to that we secure the availability of our components and also our delivery capability to the customers to be sure that we can deliver also large orders when we get them. And year to date, we have increased the inventory 242 million. You see here that we have increased the inventory percentage as a percentage of the last 12 months net sales. And we are now close to 24%. And it's probably approximately where we will be. Related to costs in the transaction, accruals have increased with 51.3 million. So we have costs related to a transaction which was not paid at the end of the quarter, but paid here now during Q4. And those two components, the items, the inventory and this accrual, basically builds up the net change in working capital of minus 5.7 million. That is a positive cash flow effect. So the cash at the end of the period amounted to 581 million. where the merger contributed with approximately 184 million. And we still have a loan outstanding with Svenska Sportkreditt amounting to 42 million at the end of the quarter. So the net cash at the end of the quarter was 539 million. So we have a quite solid financial position. We have had quite some work. to do when we close this quarter as we did this merger and the transaction. And I've tried, we have in the report a specific note added where we try to explain also accounting wise what happened with this merger. But the short story, so the merger was made as a reversed merger from accounting perspective. So ACQ is still the surviving company, the legal entity, so to speak. But accounting-wise, we have did it the other way around. And thereby, we don't get so big effects on the total balance sheet. Otherwise, we would have ended up with a super big goodwill and a big equity and so forth. And so the net equity effect is only 229 million. And when looking at the numbers, the old Ubico numbers that you recognize and that is the Ubico numbers that we carry with us also as comparable comparing numbers in our reports going forward. Transaction related costs or expenses. We have reported, to be very clear, so we have reported that on a separate row in the P&L report, and it amounts to almost 94 million. And that is, of course, the item affecting a comparability with this adjusted EBIT. And this cost, it consists of advisory costs and employee-related costs, accounting amounting to approximately 43 million. And in addition to this, we also have a cost for cancellation of incentive programs, our old stock option programs, and the merger loss when we added the ACQ balances into the Ubico balance sheet. And that totaled to 50.9 million, those two last categories. And those two does not affect cash flow. It's only technical. And then looking at the net cash contribution as well. When you look at the cash flow statement, it looks also a bit strange, or so to say. I'm trying just to explain what happens. So the net cash contribution from the merger was 184 million. And that consists of Both the cash balance in ACQ before the merger, which is 3.4 billion, and cash consideration paid out to the Ubico shareholders in the transaction of 3.8 billion. And then adding to that the share issue, part of this placement, adding available cash for us also to pay to the shareholders. of 133 million. And then also we had you because option and warrant holders were exercising those into shares in related to the transaction. And that added also 430 million in cash to the company. So there were quite many unusual transactions to speak in this. So I leave it over to you now, Mattias.

Thanks, Camilla. And please feel free to reach out to us with questions. We realize that when it comes to how the transaction gets treated in our balance sheet is a little complex, but it all adds up. And this is the one, of course, for this quarter, with the exception that we're making payments for some of the costs and have done so in Q4. So we feel that this quarter, which has been an intense one from a number of perspective, sets us up for continued good growth. The business is performing well and in line with our expectations. In full candor, we had actually set the bar even a little higher in Q3 in terms of order bookings. So we saw some, sorry, in Q3. So we saw some of the orders slipping into Q4 and therefore we're particularly happy to see that we're off to a great start in Q4. including a significant order from a long-standing high-tech company to the tune of 86 million kronor, which means that we're off to a great start. Another fact that bodes well for the future is that we've really broadened our customer base and we have a very healthy sales pipeline going into Q4 that we're now executing on. We're working on a lot of interesting product and business development initiatives. Some of them will actually probably paid dividends already this quarter, but the other ones that I've highlighted are also for the long haul, which will have a big impact. For good and bad, cybersecurity has never been more important. We're happy to be part of the solution there and working with the good guys, so to speak. It is a rapidly growing market because of the trends going on in the world, of course. So to summarize, we feel that this quarter means that we're in line with our guidance that we provided for 2023. So, the guidance for the year remains unchanged. And with that, the plan was to hand it over to questions. I think we'll start with those who have questions live. And we have a small queue there. I think Fredrik from Conege is first in line.