Yubico AB

Welcome to the Q3 report presentation for Ubico. As mentioned at the start of the call, on the call today are Camilla, Ubico's Chief Financial Officer, and me, working as Ubico's Chief Executive Officer. And we'll start with a short recap of our company to give some background before we dive into the quarterly So Yubico, we're active in the advanced multi-factor authentication sector. And we're a proud hardware company. The core product that we have is the YubiKey. For the last 12 months, we posted sales of approximately 2.3 billion Swedish kronor, or about $220 million. We're about 470 employees. And in spite of us being a hardware-based company, we've been able to maintain healthy gross margins over the years, pretty consistently in excess of 80%. And the reason for that is that most of our development, most of our product offering is really the software that goes on the hardware. And there are typically two things that we want to highlight as the things that we're really proud of when it comes to our company. The first one starts with the product course, the fact that our product addresses a very real and tangible need for our customers. There's a high level of cybersecurity threats, and those customers that have been using our products have experienced zero account takeovers. So that's, of course, the foundation of our success. Based on that success, we've to date sold and deployed more than 30 million YubiKeys, and our focus has been on selling into some of the world's largest companies and organizations. We have about 5,000 business customers today, and as an individual and as a consumer, you're even able to buy our key online, but our focus is on working with large companies and organizations. And today, already some 30% of the Fortune 500 companies are customer of ours. So to dig a little bit deeper and talk about our product, what is it that we do and what problem does our product solve? to the next slide please so fundamentally what we're selling is a key and a key is only helpful if there's a lock at the other end our key is used to ensure that there is no account takeover it's used for safe logins to access data information and systems and we've invested a lot in making sure that our key fits into all the relevant locks out there so it covers today the authentication requirements for that are found within a big organization or company, whether it's for remote access, whether it's for privileged access, whether it's used for different types of system access. We've spent a lot of time making integrations and building support for all the systems out there. And we have developed what we like to call Swiss army knife type key, i.e. a key that fits into all the locks, meaning that a company can use this for all the authentication requirements within an organization based on the protocols or functionality that is on the key and the integrations that we have made with the different systems. And the fact that we find this usability and that it's easy for the user to use our product with the highest level of security, that's the foundation of our success. If we talk a little bit more about the customers on the next page, we can see a subset of our public references. And it's worth noting perhaps that you see a lot of high tech companies there. That's where we started our growth journey, working with the largest tech companies in the US. But today we have a very broad composition of customers across a wide range of industries. And to go from the visuals into the statistics, if you want to flip to the next slide, please. As I explained earlier, we sell our product to a very wide range of customers. You can even buy it as a private individual. But our focus in terms of our sales offers to date have been on working with the largest accounts. And if you not just only talk about the Fortune 500, but instead the Global 2000, today already about a quarter of them are customers of ours. And that share has increased over time. Back in 2018, it was about 12% of the Global 2000s, today it's more than a quarter. However, our penetration among our existing customers, if we compare the number of keys deployed compared to the number of employees, is still very low. Typically, we start with a small subset of users, PAM users or a call center or people with access to all the critical areas, and then we expand from there. So even if we've landed a lot of big accounts, the big opportunity is expanding within those once we've got our foot in the door, so to speak. And we do have two different business models. Coming up, we'll get back to that when we talk about the quarterly results. We sell on a perpetual basis where we outright sell the key with a perpetual license without any additional cost to use any associated software. And we also have a subscription model. But no matter the buying model for the customers, we see a lot of repeat business and very loyal customers. And one illustration of that is that if you look at our biggest customers and what their repurchase pattern look like every year, if we take a five-year perspective on that, pretty consistently, we see that we see annual repurchase rate in excess of 100%. Part of that is, of course, because of that expansion that happens once We've landed a big customer, but part of it is that they want to make sure that they have the latest version of the key, that they find out new use cases, and that they want to cover for employee attrition, etc. We've also diversified our customer base, as I mentioned earlier. We started out with high-tech, so five years back, about two-thirds of our sales was high-tech. In 2023, high-tech was still our biggest sector. representing almost a quarter of our sales. But this year, it's actually even been eclipsed by financial services, bank and insurance companies by a small margin today being our biggest sector. So in summary, we have some very large accounts as our customers. However, the journey has often only started with those accounts and we see a lot of opportunity to upsell within the existing customers. In addition, of course, to buy, to attracting new customers. all the time. So that's a little bit of a background about our company and our business. And then going then into Q3 and some things to highlight. We feel that Q3 was a very strong quarter. We'll get into the details shortly, but high level, we feel that we've had strong growth in order bookings, which converted into strong net sales or revenue growth. And because we're able to maintain a healthy margin, healthy gross margin and we have cost control that turned into a good profitability and we were able to translate that profitability into strong cash flow. So overall we feel that this was a strong quarter and we're very pleased with the results that we've got. We should highlight as we did with the security advisory that we released on September 3rd that there was a vulnerability that was found in our previous versions of our YubiKey. rated this as a moderate severity vulnerability because you literally had to have physical access to the product for an extended period of time. You needed to rip off the plastics, you needed to apply advanced machinery, and in most cases, even know the associated password and PIN code, and then you could theoretically make a copy of that and skip the original key once remolded back to the original user. In reality, and this is definitely a vulnerability and it shouldn't have been there, but in reality, I think very few customers saw this as a big security threat we've been in contact with the major customers and it's been a very moderate or minor i should say impact so it didn't really have much of an impact this quarter long term it's of course very important that we're able to maintain both high security but also strong transparency when it comes to the security and the integrity of our products So another thing that we'd like to highlight other than, of course, the financial numbers is that we're seeing strong growth across a broad set of customers. So it's not just one geography or one sector or one specific customer that stands out. It's been broad based. There are two sectors that were particularly strong during the quarter. It was the public sector and high tech. And it was broad based among those sectors. One thing that we'd like to highlight is, as mentioned earlier, the majority of our sales is for enterprise use internally. But we're seeing more and more signs that our customers want to take our product to their end users, in particular among banks. And it was released during the quarter that we've initiated a cooperation with the largest bank in Central and Eastern Europe, the largest bank in Poland. PKO Bank was now built in support for use of FIDO and YubiKeys. in their online platform and recommending their customers to use YubiKeys to ensure their accounts don't get hacked. This is, of course, a motion that we're really happy about. It's still early stage, didn't have a large impact on our revenue, but we're running now a number of pilots together with our customers to get to end users. That to us is the best route to getting to end users and consumers working with customers and partners. And finally, on a more admin point, We have announced a nomination committee in preparation for the 25th annual general meeting, but that, of course, didn't have much of a financial impact for the quarter. With that background, I'm going to hand over to Camilla, who will go through the details of what I feel is a solid quarter.

Thank you very much, Mattias. Yes, it feels quite strong when looking at the numbers. So on the order bookings we see a continued strong growth, 53% year-over-year growth, but in local currencies even more, so close to 58%. Notable is that subscription share is 15% of the total order bookings, which is the same level as last year. But of this 89 million we have in subscription order bookings, Actually 62 million is related to renewals. So where we have customers that are now starting on their second contract period for subscription. On net sales, we also saw a good growth, as Mattias said. The order bookings are coming through to net sales. So we saw a growth year over year of 45%. And in local currencies, even 49% subscription share declined year over year. And that is due to that even stronger development within the perpetual customers. And so the subscription share declined from 14% down to 12% this quarter when it comes to the net sales. On the gross profit side, we are happy to see that we have a stable gross margin, 81% this quarter, and as you have noticed, we are around 80-82% during the quarters here on the gross margin. On the profit side, despite that we are continuing investing in R&D and sales and marketing, to secure also the business going forward. We see a substantial improvement in the EBIT from 16 million up to 111 million. And of course, that is related to the volume growth that we have seen this quarter compared to last year's Q3, which was an unusually weak quarter, we should say. Looking deeper into bookings. We see that here in this chart that the Q3 bookings is substantially higher than last year, and year-to-date we see a growth of 61%, so it's fairly even over these first three quarters. So we grow from 1,865,000,000 to, sorry, from 1,155,000,000 up to 1,862,000,000 year-to-date in bookings. And I said this is the first year with renewals of the subscription contracts. And looking at the TCV, 56% of it is related to renewals. And year-to-date, there is 56% year-to-date. I would say. And of course, we're happy to see that these renewals are coming through as a confirmation from our customers that they really have trust in our security solution and want to continue. The share of subscription bookings for this quarter is the same level as last year, as said. But year to date, we have increased the share actually to 18% from 12%. positive and the order bookings and this quarter it came from a diverse customer base and Largest orders from public sector major major tech companies, but we also see continued interest from European defense sector in in the market here and Looking then deeper into the net safe as well we see the year-to-date net sales amounted to 1.7 billion and And there was a growth now year-to-date close to 34%. Subscription sales represented 12% versus 14% last quarter. And of course, this decline is then contrary to Booking's development, as you see, that we had actually increased the share year-to-date. But because we have the stronger development at Perpetual, where we see the net sales coming through directly and also that we have an effect of renewals and which is not new revenue then and we also see that the larger larger contracts with longer contract periods also we see that geographically we see an increasing a diversity so we see that EMEA is and also Asia-Pacific is actually growing more than America's and becoming a larger part of the total sales. On the ARR side, we have a growth of close to 15% compared to last year and are now running our subscription yearly value of the subscription portfolio of 293 million. at the end of September. So this is measuring the yearly value of a subscription portfolio at the end of the quarter. So it's kind of a future-looking revenue stream with the current contracts. On our profit side you see really a hockey stick here coming up on the rolling 12 months. uh so with the volume growth that we have now and the stable gross margin uh really supports the the growing profit so and now leaving as you see the quite weak q3 last year behind us we get this increase in the rolling 12 months ebit from 360 million up to 411 million actually um We also have investments in the R&D and in sales specifically as we are a growing company and the need to continue to grow our organization and with our people. Our adjusted EBIT margin was 18.8% this quarter compared to 4% last year's quarter. And you see here also looking at the EBIT, we have adjusted EBIT and we have the EBIT and this is the quarter, the only quarter we have had Q3 last year where we actually have a one-off item that is related to the merger between ACQ Bure and Ubico a year ago in September last year where we had some transaction related costs total of 93 million that is included in last year's EBIT, which was negative of 77 million. We mentioned the ELTI program. We have the PSUs here because it is kind of a cost increase. This program was launched in June. We commented it also in last quarter's report. This is the first quarter where we see three months effect of it and the reason why we commented is that the impact is higher due to we have our own financial targets as measuring the performance of this PSO program instead of having the share performance as target and thereby the cost that we're recognizing is three times higher approximately. And with this month we also saw an unrealized currency effect of negative nine million in this quarter. The first half of this year we have had quite minor effects from currency changes. And finally looking at the cash flow which is also a nice story as Mattias said and as You remember, we have talked about during last quarters that we are investing in our inventory. We started to build up the inventory from a very, very low level 2022 and during 2023 and up to Q1 actually this year to both reduce the risk we have in the business when it comes to critical components and if they would just have a hiccup when it comes to deliveries. So that's the dark blue part of this chart. But also as a growing business, we also need to make sure that we can deliver quickly when we get large orders. So we have strategically built up the inventory during these last quarters. But as you also see, we are now continuing the downturn of the ratio between the inventory levels and the rolling 12 months net sales. So we have the peak in Q1, 30%, declining Q2, 29%, and now we're going down to 28% at the end of this quarter. And the net working capital, changing working capital is negative this quarter, 74 million. Except from that, we also increase our inventory in absolute numbers this quarter as well. We also see growing accounts receivables due to strong billing. And we also see effects of subscription contracts that we have been invoicing earlier this year that we are now recognizing the revenue and having a negative impact on the cash flow. But despite those things, we see a strong operating cash flow of 67 million. We have a cash and cash equivalent position, which is strong, 727 million. Net cash at the end of the period, 676 million, and thereby we have some interest bearing liabilities of 51 million, where 22 million are office leases. The rest then that's an external loan that we have which will be amortized in full during December So that is pretty much the financial Numbers for the quarter and I leave back to you Mattias Thank You Camilla just to wrap it up real quickly so what's going on here I think we've delivered solid growth for four consecutive quarters now and

That's of course driven by some tailwind in the market. The cyber threat level is very high. And as I think I was able to highlight earlier, we do offer a solution, which is a very tangible and cost efficient way to mitigate one of the major threat vectors when it comes to cyber crime. Again, to repeat myself, when you look at meta studies of cyber attacks, you will find that in 80% of the cases, compromised login credentials was a critical factor. So by ensuring that you have strong MFA, you are addressing one of the major cyber threats out there. So that's kind of the underlying market dynamics that are working in our favor. That's even faster propelled by the AI enabled attacks that we're seeing on a broad basis now. And as I highlighted earlier, The bulk of our revenue and our focus when it comes to sale remains internal enterprise use, but we find it very encouraging that our customers are now, in an increasing number of cases, taking our products to their end users and that could be an important revenue source in the future and an important way for us to even help individuals and consumers up level their security. Part of that, too, is that we're active to ensure that we can not just protect logins, but even protect users. To do so, we need to cover the full life cycle of a consumer, and that's the light I see the efforts that we're making when it comes to different projects for identities, especially in Europe, where we're working with the EU DI wallet initiatives. And finally, I'd like to highlight the fact that we have started our structured CSRD work. More to come there. And of course, fundamentally, we feel that our product does have a positive impact in protecting identities and making people safe online. But of course, we want to review our business and see how we can ensure that we run our business properly from an environmental, social, and governance perspective. More to come there. So I think we've built a solid base for future growth and we're quite happy with the quarter. With that note, we'll open up for questions and I believe we'll start off with some of the questions, some of the people standing in line wanting to ask questions. Over to.