Yubico AB

We had a great start to the day. Sitting with me is Camilla Öberg, the CFO of Ubico. We're going to do a short presentation related to today's release of the interim report. And as usual, we start with an overview of the company. And I know that several of you have heard us present this before. But for those that are new to the table, we figured we should start and explain a little bit of what we do. apologize if you've heard that part before then i will hand over to camilla who will talk about the q2 report um it's all news in that section so so um say the best for last and then we'll do a quick a wrap up and open up for questions um so um let's dive straight into it i hope you can see the presentation if you're not able to if we're not able to see each other And just a high level of what Yubico is as a company. We typically highlight two things that we're very proud of. One is our core product, the YubiKey, and the important security issue that it addresses and mitigates. It's about securing logins, which is one of the key problems when it comes to cybersecurity, stolen login credentials, depending on what study you look at, is a major factor in somewhere between 80 and 90% of all the hacks being reported. So it's a critical problem, and our product offers a very clear solution to that problem. And we're very proud to talk about the fact that for those customers that have implemented our product with the new protocols, they've experienced exactly zero account takeovers. And we want to keep it that way and keep investing in having the leading product staying ahead of the hackers and the competition. Since the inception of the company about 16 years ago, we've sold and deployed about 32 million YubiKeys. I hope you've all seen what they look like, pretty much like a USB stick, but they're about securing logins. We have had a focus, and that's the second part that we typically like to highlight, on selling into major enterprises and government and public sector. This means that we have a very impressive list of customers. Some 30% of the Fortune 500s are already using our products to some extent. And if you look at the Global 2000, the share is about 28%. We'll get back to that. And so with this focus, we've focused on larger customers, In total, we have about four and a half thousand business customers and millions of individual users. But the bulk of the volume is to internal enterprise use within public sector and large enterprises. In terms of size of the business today, we're 459 employees, a little bit more than 400 employees, posting revenues about 2.1 billion during the last 12 months. Despite the fact that we're a proud hardware-based company, most of our investment and most of our focus is on developing software. And this has enabled us to maintain healthy gross margins pretty consistently in excess or in the range of 80% throughout the years. And that's Yubico in a snapshot. Diving down a little bit more about our product and the product that we're so proud of. Fundamentally, it's about getting YubiKeys into the hands of users. needs to be remembered is that we're offering fundamentally a key there always needs to be a lock at the other end and when we started the business 16 17 years ago we had a pretty basic key that only fit into one type of locks since then we've invested a lot in building a more versatile key a swiss army type army knife type key that fits into all the relevant locks and this means that today users within an enterprise environment can use our uv key to authenticate and log into all relevant enterprise solutions. This is partly about the functionality on the actual key and the firmware that goes on there. And it's partly about integrations that we have made into other systems. It used to be us doing all the heavy lifting there, making sure that our keys fit into more locks. And now we find out oftentimes afterwards that someone has built support for the UPKeys in their platform. And that's, of course, very encouraging. So we established a We've been part of building an open standard with the FIDO Alliance, which is now growing very rapidly, that type of authentication. But we've also created a little bit of a standard in saying, oh, if you want to log in securely as an enterprise, what do you use? Well, you use the YubiKey. So that's the foundation of our success and what does success look like? If we flip to the next slide, please. Well, these are highlighted. On the next slide, we highlight some of the brands that are willing to be public references for us. of our major customers you can see that it starts with a lot of tech companies and that's where we started our growth but lately the fastest growing sectors has been financial services public sector manufacturing etc so it's a pretty broad base it's still the majority of our sales is still in the us but now sales are really picking up especially in europe and to some extent in asia pac and we're very um part of our customer list and we work very closely with them, with our biggest customers to understand their needs as we develop our product. If you look at a more statistical look at the customers, the next slide illustrates an important part, which I already mentioned, which is that we have this focus on big customers, i.e. a large share of our revenue is from the biggest companies in the world. One way of measuring that is, okay, so how many of the biggest companies have started using our products? And it's encouraging to see that we have growth there. If we look five years back, about 12% of the global 2000 were existing customer of ours. In 23, as we exited 23, it was about 28%. So there's growth that. I should say, though, that in most cases, it starts with a small deployment for high security users or a specific user case, for instance, within call centers where they can't use their own cell phones, et cetera, for authentication. So that's typically how we start and how we get our foot in the door. And then it's about expanding from there. So we have a very high repurchase rate. As we talk about the numbers and as we analyze them, it's important to note that we have two different business models. One, which we call the perpetual sales, which is essentially a one-off sale where you buy the hardware with a perpetual license to use any associated software. And it's a very durable product, so that means that it's a one-off. We also have a subscription model or a service model where we commit to delivering a working authentication solution for our customers. And then it's typically a three-year license to use our products to securely authenticate for the customers. Even before we launched the subscription product, which was launched about four and a half years ago, we saw a lot of repeat purchases. We've looked at this in different ways, and one way to illustrate it is that if you look at our biggest customers in 2018, our 50 biggest customers, sorry, our 25 biggest customers, what did their repurchase rate look like on a yearly basis for the next five years? And the median customer had an annual repurchase rate of almost 120%, i.e. if they bought 10,000 keys in 2018, they bought 11,900 in 2019, Another 11,900 in 2020, et cetera. And there are two reasons for that. One is what I just mentioned, the land that expands strategy. So even if it's our biggest customers, typically there's a lot of room for growth within the user base. As we start with the high security users, then we expand into a broader population. In some cases, reaching 100% of the employees, depending on the type of the business. So that's one part. The other part is... that there's the kind of inherent, even on an installed base, with a perpetual model, people would typically repurchase 25, 30% on an annual basis, partly because of employee attrition, people losing their keys, but as importantly, to get the latest functionality by buying the latest version of the product. So we see a lot of repeat business, and this is something which is important for maintaining our growth, that we work closely with customers and see that growth. And finally, to summarize to you what the customer base looks like, as I mentioned, we started working primarily with high-tech companies in the US. Today, we see a much broader set of customers. So it used to be that we could only sell into high-tech companies. Now, with a more versatile key, we can be useful to a much broader set of customers. The next step, of course, would be to expand not just to the biggest companies and public sector, but also to get into the hands of smaller and mid-sized companies and consumers to a much larger extent. Great. I think with that, I'm going to hand over. Before I hand over to Camilla, I should do some highlights from the quarter summary, and Camilla will go into details. We're very pleased to see that we saw another quarter with strong order bookings growth. at about 66%, so very close to the pattern we saw on Q1. It's also encouraging to see that now we're translating that order bookings to a large extent into revenue, i.e. we're delivering to our customers so we can recognize the revenue from those order bookings. It was important for us that we released a new firmware version in May that always comes with some risk in terms of customer acceptance. It was a successful release and it's important as it enables new functionality that we can develop further One example would be the pre-reg that we've launched, but we're also working closely with Microsoft to make sure that it works. Our product is more easy to deploy and use within their environment. On the more formal side of things, we had our first AGM as a publicly listed company. Two major items I'd like to highlight there was the election of Jaya Baloo as a new member of the board. Jaya brings in a vast experience as a security professional. working in commercial and public organizations in the US and Europe. And so I think she will be really helpful for us as we think about how we can improve our product offering. And also we had an approval of the long-term incentive program that was proposed by the board. Final thing, we're proud to be setting standards and kind of setting the bar for what strong authentication should look like. And of course, within our niche or within our segment, we're a well-recognized company. But it was interesting to see that we were recognized as one of the most influential companies in the world by Time magazine, which means, I think that highlights two things. One, the importance of cybersecurity. And second, that we've established a really strong position in an important segment of that market. Yeah, with those highlights, at the risk of stealing the thunder from Pamela, she will go into the details of the quarter.

Thank you very much, Mattias. And just to perhaps remind some of you, or also for you who are new on this call, or to the company, remind you that Ubico is very much a US dollar-based company in our business, but we are reporting Swedish krona, so that is good to be aware of or have in mind. and also that we transitioned into IFRS accounting and reporting and also changed to a functional based P&L format as of a Q1 report. So that is what we have with us still here. So as Mattias said, we have a strong quarter on the growth side and a solid profitability. On the bookings, we grow with the 65.5% to 673 million. There is also a large share of renewals in that light blue subscription bookings. You see, there is a growth year-over-year on 136% of the subscription bookings. That reminds them that it's a large share of renewals. We'll come back on that. On the net sales, we see now also that the good order bookings, the last quarters, also fall through into the net sales. So the growth is now picking up to 36%. And it is driven by the perpetual sales. As you can see, that the subscription sales is quite much in the same level as it was a year ago. The gross profit margin, stable on 80%. And this then is including the employee costs in the gross margin related to functional based P&L that we are using now. And on the profit side, the EBIT is also stable. We are running on around 21% EBIT margin from 97 million up to 131 million and very similar to the profitability last year. Then we will deep dive into the booking side. Last quarter we didn't have any effects from local currencies. But this quarter, we see that we had the 65% bookings growth turns into the 63% in local currencies. So quite a still small, still quite small difference there. The bookings growth was driven by the diverse customer base, as said, good momentum in the financial sector, major tech companies where they see the largest orders coming from. But also we see that the European defence sector is still very relevant and also that Europe as such is growing faster. The subscription booking amounted to 142 million compared to the 60 million last year and also then becoming a larger share of the total bookings, 21% this quarter compared to 15% last year. And we also see then that in this subscription bookings, we have a large share of renewals. The largest among them are a large financial customer where we have a renewal with an expansion. And then we also had a renewal with a large US government agency on the same level, to say them. Moving over to the net sales. We see now that we are increasing the growth rate to 36%. Looking at local currencies, it's quite a small difference to 35%. The subscription represents 9.7% of the net sales, which is the same level as last year. So our net sales is very much driven by perpetual sales right now. And also I said we have also on the net sales side we see that EMEA or Europe is growing faster than the other regions. That is really nice to see. On the ARR side we have increased with 18% since a year ago. and adding around 11 million in ARR, net ARR, I would say, versus Q1. Good to see is that we are turning ARR trend positively again, as we had a small dip in Q1. Adding to the ARR for this quarter is a new long-term contract, which was closed in Q1. and also this higher volume renewal within the financial sector though we can also say that for for this quarter uh there is not the full effect from those days so we will see more coming from that in in the future looking at the ebit side we have a stable profitability asset The gross profit grew to 493 million Swedish krona and we are running on very stable on 80%. We have done so for quite some time if you look also historically. The EBIT is growing to 131 million and with the same level of margin as we had a year ago. The cost side is driven a bit from sales expenses, and that's of course due to that we have very good order bookings. So that is directly paid out and is a cost on our P&L. The long-term incentive program, I'm so sorry to miss this, but there are some rebuilding in this building. I hope we can continue. The long-term incentive program, which was approved in May, where we granted these PSUs in June, there is a cost for that in the P&L, even if it will be paid by shares. But for one month, it was a cost of 6 million Swedish krona. And that is also that we will keep with us now the coming 36 months as well, just to be aware of that. as that is a new cost. We had some unrealized currency effects from our balance sheet, affecting the profit negatively. Minus seven million this quarter, minus five million comparable quarter last year. So not so much to say about that, I think. And then we go over to the cash flow. We had a good cash flow this quarter, operating cash flow of close to 120 million. We have broken the trend for our inventory build-up. As you can see, if you recall last year, we have invested quite much in building up our inventory, both from securing components, and also securing our ability to deliver to the increased demand and being able to deliver large shipments to large customers when we receive the orders. We are in good shape and you see now that we have a bit decline in this ratio between inventory and 12 months rolling net sales. So a small reduction from 30% to 29% now versus Q1. We still had a negative cash flow effect from the inventory on minus 29 million. But in total, the net change in working capital was very close to plus minus zero. So that is good. Cash and cash equivalents at the end of the period was 678 million, so we have really built up the cash. And net cash at the end of the period was 645 million, that meaning that we had interest bearing liabilities of close to 60 million, where of leases is 27 million, and thereby saying that A real loan, sorry to speak, an external interest-bearing loan is currently on 32 million. Yeah, I think that is on the cash flow and the numbers. And I hand over to you again, Mattias.

Thank you, Camilla. Sorry about the noise. Hopefully we can pause the construction work going on for a short while. But that was what happened in the background there. not a cybersecurity attack. But the importance of good cybersecurity and the threat remains very high and continues to grow. And I'm very happy that we are able to provide one of the most effective and cost-effective mitigations to that threat. So that is, of course, the underlying, well, that's the foundation for our growth. As it impacts different sectors, we can see now that the financial sector has been growing in importance to us. And I think it's kind of an obvious, the obvious reason for that is that hackers go, some types of hackers go where the money is. And banks and other financial sector actors are an obvious target for that. We have historically been very US focused. and the US continues to be our biggest market, but it's very encouraging to see that it's not just our product isn't just applicable to the US market and its customers, but it's actually something which there is demand for worldwide. We have had a very successful quarter in the EMEA region. We have a strong sales team there now, which sets us up for continued growth. Of course, the most important thing is that we can have a positive impact for our customers. And to have a positive impact, our product needs to get out and deploy to the users. So that's why we're investing so much in making it an easier experience to both deploy and use our products. And there's much more to come and to say about that in future quarters about the technical development that we're doing. But one of the important foundations was The thing that we highlighted earlier about releasing a new firmware version in May, which sets up for new functionality and a better customer experience fundamentally. And again, it is very encouraging to see that we're becoming more known outside of just the cyber security experts. It's an important market. It's an important segment that we're in. And I think the Time Magazine recognition is just one indication of the fact that we have a product which is of interest and applicable to a very broad set of users. So we're only at the cusp of making sure that we can realize our vision of making the internet securing for everyone. Started with the high-tech companies, now going more broadly with big enterprises and public sector, and over time impacting even individuals. That's what we aim for. With that, we'd like to wrap up the presentation part of this meeting and open up for questions. If I remember right, we should start with the phone questions in terms of order.