Yubico AB

Welcome to Yubico Q1 2025 report presentation. For the first part of the presentation, participants will be in listen-only mode. During the questions and answers session, participants are able to ask questions by dialing pound key five on their telephone keypad. Now I will hand the conference over to CEO Matthias Danielsson and CFO Camilla Oberg. Please go ahead.

Good morning. Welcome to Ubico's Q1 report analyst call. With me today, I have Camilla, Ubico's CFO, and I'm Mattias Danielsson, CEO at Ubico. And we will start by describing the company and its market a little bit, then talk a little bit about the highlights from Q1, and then we'll dive deep into the numbers of Q1 and finishing up with a Q&A with direct and written questions. With that, we'll dive straight into it. Give a short overview of Yubica's company. We are the company behind Yubikeys, which are used to protect your logins. Since the company was founded back in 2008, we've sold and deployed about 38 million Yubikeys. We're a proud hardware company, But since a lot of the value that we're providing to our customers protecting their accounts lies in the software that we provide with the hardware, we're able to maintain healthy gross margins pretty consistently in the 80% range. We've grown, had a growth journey over the past 15 years. Over the last four years, we've grown by an average 40% per year. So today, over the last 12 months, we've had net sales of about 2.5 billion Swedish krona. We have some 500 employees. And if we talk about what we're really proud of, there are two things that I want to highlight. One is our product and the fact that it addresses one of the major threats when it comes to cybersecurity, protecting logins. And we're very proud of the fact that those customers that have implemented our product and the modern protocols, they've experienced zero account takeovers. And we, of course, want to keep it that way. So we're very proud of our product. The other part that we're very proud of is the customers that we're working with. you can buy our keys online and use it to protect your own personal accounts but our focus has been on selling into large enterprises and public organizations and we have about 5 000 large and small mid-sized companies and then millions of consumers using our product including some of the most high-profile security conscious organizations in the world so that's us in a snapshot and as i mentioned What we do is that we protect logins through what's called MFA, multi-factor authentication. Specifically, we're in the most secure way of protecting your logins, i.e. advanced authentication. I mean, the most common way to log in is still using username and password. If you want to increase your protection, you add a second factor, a multi-factor, in addition to the password, something that you, not just something that you know, like your password, but something that you are, biometric or something that you have, for instance, a physical device. and there is a growing realization that if you want the highest level of assurance the highest level of security you need a hardware-backed multi-factor authentication solution and we're the leaders when it comes to modern multi-factor hardware based multi-factor authentication the best definition we've seen of this market currently is that the market for advanced authentication in the worldwide is about five billion dollars and comparing that to our sales numbers that means that we have only about five percent of this market so how can we maintain that we're leader well we are the leader in modern quarterback mfa there's still a lot of um legacy solutions out there. Most of them are smart card based. They offer good security but what we offer is a unique combination of good usability and user experience combined with the highest level of security. With the increasing cybersecurity threat, the overall cybersecurity market is growing quite rapidly, and advanced authentication is estimated to be growing at 14% worldwide, and we are seeing an increase in market share there, which means that there's plenty of room for growth for us going forward. We mentioned quickly that we offer a unique combination of usability and highest level of security. And what's unique about YubiKey and the solution that we're offering is that it means that you can use the same device for secure logging across all relevant systems. so we've invested a lot of money making sure that our key fits into all the relevant locks out there so to speak meaning that you can use it for any type of device whether you're using a laptop stationary computer or a cell phone or an ipad and you can across use it across all the different software solutions that you're using across operating systems and across the systems that are used by all enterprises today. This means that you don't need a whole different set of authentication solutions, but you get the highest level of security across your organization and across your use case. which means that unlike historic safe solutions for for advanced authentication this is one key that fits into all the relevant logs part of that is making sure that there's a lot of functionality on the key and we spend a lot of time developing the key over the years and the other part is making sure that there are good integrations with all the major use cases different vendors and different devices and we have invested in this and built an ecosystem where the YubiKey is ready to use for most applications that you find out there. uh so we're very proud that based on this that we've been able to uh to attract as customers some of the largest companies in the world our focus has been on selling directly to large enterprises and government agencies and if you look at the fortune sorry the global 2000 already some almost 30 percent of them are existing customer of ours However, our average penetration rate among those customers is still very low. Typically, we start with high security users and only over time we scale into a broader deployment within those customers. So there's definitely a lot of room for growth within the existing customer base. Our best estimate of the penetration we have among our global 2000 customers, i.e. measuring the number of keys deployed with a number of employees within this organization, is still only in the 6% range. So there's definitely a lot of room for growth. Good news is we see a lot of customer loyalty. So we have two business models and we'll talk a little bit more about that as we get into the numbers. We have what we call a perpetual sales model, i.e. you outright buy the key and you can use it eternally with the associated software. We also have a service model where we support customers as they deploy the keys and you instead subscribe for our services over typically a three-year period. No matter the business model, we see a lot of repurchase from existing customers to the extent that when you look at the perpetual model, our average annual repurchase rate is in excess of 100%. Why is that the case? It's not because people lose their keys. Of course, there's a little bit of that, but the majority is that we grow within our existing customers, i.e. that they not just cover for their employee attrition, but more importantly, that we expand the use case within existing customers. We started out working only with very security conscious and very techie customers. We started working with leading tech companies in the US. But over the past five years, we've broadened our customer footprint substantially. So today, we see a very balanced set of industries using our products, but with a focus on security conscious organizations and security conscious and threatened groups within those organizations. But the biggest industries today for Ubico on the customer side are financial services, public sector, and then high tech being the third biggest sector. As we think about how we can grow going forward, we've communicated two financial targets. One is on the growth where we've said that our midterm, so in three to five year perspective, we should attain an average annual growth rate of at least 25%. But we also want profitable growth. So we are targeting a 20% EBIT margin combined with that growth. And to accomplish that, A lot of it is really about taking our technology to masses and taking it to a broader user audience. meaning expanding our reach within new geographies and new types of customers. We want to make it simpler to use our keys, to buy and to use our keys, because the biggest hurdle is not that people don't want the highest level of security. It is the additional hassle that comes with rolling out and maintaining a fleet of hardware based authentication. It is much easier to roll out software, but it doesn't come with the same level of security. So the more we can do to make it simple, the better. And then longer term, we also want to evolve our customer offering. Our authentication solution is used in a broader cybersecurity landscape, and there are some obvious areas for growth that we've identified as we can expand our offering to existing and new customers. So with that, we feel that there's ample opportunity to invest in our business. So in the medium term, again, we've said that we will not pay any dividend despite being a profitable company. Real quick, we have had a focus on big customers and you see on the image to the right, some of the public reference that we have. If we talk about specific customer developments during the period, there are a couple of things that we want to highlight. One is Landshalbstadt München or the city of Munich. which have made public their use of YubiKeys within their organization. And this is an interesting case for us because we see a lot of demand for the public sector. And it's not just the security organizations or departments of defenses. It's actually protecting citizens and public organizations throughout the spectrum of public sector. So we're very proud to be working closely with the city of Munich here, and they've agreed to being a public reference and even showing how our keys are being used internally, which sets us up for continuous growth within public sector, including municipalities across Europe. Another thing within the public sector that we're very proud of is our continued engagement with a lot of Canadian authorities, both large and small. And one of our key competitive factors there has been our ability to support our customers. They've come to realize that they need us at the highest level of security, and we are the ones who are able to support them as they roll it out to a broader set. So that's important that we're able to take on customers that are not perhaps in the tech sector, and still support a successful deployment on a rapid basis with customers like Canadian authorities. And finally, we've highlighted before, but it's another great success story we've had in the past, where we're now working with three out of four major US telecoms, supporting them as they increase their security standards. As you may be aware, several of the largest US telcos had intrusions and security issues back in 23 and 24. And we're very proud to be part of the solution for these organizations as they up their security stance. More to come there. And with that, we'll just do a quick wrap up of other important events for the quarter. Overall, I'd say that Q1 was a quarter where we were able to deliver solid results. We had growth very close to our 25% target. We had profitability a little bit lower at about 15%, but I don't see any long-term reasons for why we shouldn't get to 20%. We had some one-offs, including a company conference, and then we had an impact on the quick currency exchange movements and a high cost for LTIP during Q1. So I feel we have good profitability. However, we did see a softening in demand in the sense that we are engaged with a lot of new and existing customers, but we saw some hesitation towards the end of the quarter because of growing concern about the macroeconomic environment. Now, with all these tariffs, the direct impact of those are very limited on Ubico because we do most of the value creation locally for U.S. customers in the U.S. and for non-U.S. customers from Sweden. But the indirect effect in terms of big customers thinking about making investments with perhaps a five-year perspective in mind, we see then extended sales processes. And that did have an impact hitting our order bookings for the quarter. And we're seeing continued uncertainty going into Q2. On a positive note, we were able to announce on April 15th, after the close of the quarter, that we've been able to attract Snezana Kaljeva to start a CFO company. She is still bound by her current employer, but will join us no later than in October. And on a more on admin note, today we'll host our first AGM as a company listed on the Nasdaq Stockholm main market. So all shareholders are welcome to join us later today for our first AGM in that capacity. With that I'll hand it over to Camilla to go into the financial details of the first quarter.

Thank you very much Mattias and as Mattias said this quarter has been characterized or affected by the turbulence we have seen in the world especially during March which also delayed some decision makings when it comes to order bookings and also gave a large impact on currency development with a US dollar, which became very weak. The US dollar is now actually looking at it through April on a level which we have not seen since 2022. So this is a big impact. But looking at that as the net sales, we see a solid growth. We are growing on 25%. And looking at the subscription net sales, we are actually growing that 40% year over year. And looking at the gross profit there, we see the effect of the currency developments where we see a pressure on the gross margin. We are reducing gross margin from 80.7% to 78.4%. On the profit side, the underlying profit we feel are stable, but of course the currency development from the gross margin here is also flowing through to the EBIT. And we also had our all company conference, which we have mentioned in the report, affecting the results as well. And excluding that extra cost, we are actually ending up in an EBIT margin of 19% versus the 17% last year, like for like. On our ARR, this is the yearly value of our subscription portfolio as end of the period. We are growing that as well in 25% during the year. or year over year rather. Looking deeper into the numbers starting off with the bookings and our subscription bookings And we ended up here with a decline with 10% compared to last year, affected by this turbulence. And there are customers insecurity on how they will be impacted of all the changes going on out there. We see subscription bookings close to half of the last year, 58 million. versus 104 million last year, then we should remember that we last year actually closed a quite big subscription deal, which was five year, which is unusually long for us as well. So it was a tough comparison. We saw on the largest part of the subscriptions are actually new contracts or add-on contracts compared to that we have had specifically during last year. So now we are actually adding new revenue in a larger context than we have done before. So that is really positive. And we continue to see the strong growth and interest from the public sector, the telecom and from the high-tech sector. the reduction or decrease in order bookings that we see this hesitation around from our customers it's just fairly widespread around the globe and around the sectors looking deeper than into our net sales We see net sales had a growth on 25%, as said, 22% in local currencies. The subscription sales went from 56 million to close to 80 million, growing 40% year over year. uh and uh last year's q1 you see is a bit lower in this slide than q4 the year before and that we had a larger impact from churn during q1 2024 which is also a reason why we now see when we look at the the net sales a bigger growth than the ar as such We see continued demand also when it comes to the net sales. It's contributing from a wide set of sectors, the high-tech public and telecom coming here as well. And also from our regional geographical spread, there are minor differences compared to last year, as you see here, with the Asia Pacific a bit lower. Looking at the ARR side, We see a positive trend in the quarter and a growth of 24% year-over-year. This quarter we added 29.6 million since the end of last year. And as I said, new contracts across different segments and with new revenue contributing to that, so it's positive. Continue. to the profit side. And gross profit affected by the FX, as said, 78% versus 80% last year. We believe or estimate that it's around 1% to 2% that affects on the margin here. EBIT was growing to 92 million from 85 million, and we had this EBIT margin of 15% affected by this all company conference of 26 million, which is the biggest contributor to the increase in our administrative expenses year over year. And adjusting for this, we see that we have an EBIT margin of 19%, which we think is quite strong underlying profitability despite also as you see that we have our LT programs we launched one program 2023 we launched a new program 2024 that program is more expensive from IFRS accounting perspective due to that we have our targets connected to financial targets instead of the development of the share price.