Hello, everybody, and welcome to F-Secure's half-year financial report session. Warm welcome to people here in the room, as well as on the stream. As always, I'll be presenting together. My name is Timo Laaksonen. I'm the President and CEO of F-Secure, and I'll be presenting together with our Chief Financial Officer, Sari Somerkallio. She will join me later. But let's get into it. So, as the header says, in the second quarter, we feel that the major achievements that we made were the strides on product, technology, and service development. Without further ado, our financial results and business progress we made in the second quarter was very similar actually to the first quarter of the year.
So we grew modestly around 2%, a bit over 2%, currency neutral, and our revenue growth was mostly thanks to the Lookout Life acquisition we made 13.5 months ago. In the partner channel, growth was modest. I'll get to the actual details on the next slide. Our average revenue per user is increasing as expected, and actually slightly above plan. But there are some challenges that we are clearly seeing with some partners of ours who have been with us for a long time, but are having certain difficulties in their core business that they're dealing with. Direct business, very similar as partner business, on the same trajectory as in the first quarter, so actually beating the plan, and very much thanks to high average revenue per user.
So, our Total app is, in a way, delivering on promise in terms of value, both for consumers as well as for us. Our profitability was on a good level in the second quarter. We made lots and lots of developments on the operational level, which are as such, not directly related to the Total product or embedded product. We made core technology platform and, in a way, operations-related improvements, which were optimizing our cloud operations, unifying suppliers, and, in a way, tackling certain core technology issues that have been maybe on the to-do list for some time. And at the end of the quarter, we released a new version of Total, which came with a completely new module we call scam protection.
I'll get to the details on that on the next slide. But that's the high level. Overall, a good quarter. We would have liked to see a little bit more growth, while profitability was good. If we dig into the details a little bit more. So, on the average revenue per user side, that's one of our crucial drivers for business development. The Total release that we made right now is only going to be delivering further value to consumers and ourselves, starting from the second half. But, it's got very good... Let's say, it's resonating very well among our partners. The new release and Scam Protection is very much something that first partners are already signing up to as an additional module, naturally increasing the average revenue per user.
Our own forecasts for how many of our partners and how many of our end customers on the direct business side will go for multi-module Total, we've beaten that forecast, so we're progressing better than we expected. But like I said, unfortunately, some bigger partners are having difficulties in their core business, which is then decreasing our revenue, unfortunately, and therefore, the positive effect is not as big as it could be. In terms of Total, let's say that in 2023, it was typical that our partners were selling the new Total, the single app for all needs, only to their new customers.
Now, it's starting to shift in 2024, that more and more of our bigger partners, meaningful partners, are actually introducing multi-module Total to their full customer base, which naturally drives value much faster than only selling that new offering to new customers. So that's good. And for instance, Elisa, VodafoneZiggo in the Netherlands, and Telia in Sweden, you know, they represent over one million users. In our direct business, I would say that the primary value driver is precisely ARPU increasing as people are taking a bigger entity of Total into use, and that's the primary reason why our billings is growing positively. Then in the middle part, the second area, how we're driving value, is by developing our offering, i.e. Total, and coming up with new products.
I would say that on the Total side, the introduction of Scam Protection was by far the biggest initiative we made. There is one more, in a way, functional area that we will introduce as an addition to scam protection at the turn of quarters three and four. But, you know, 85% of scam protection is right there that we plan to introduce in 2024. In 2025, more things will be introduced. But that's resonating very well. On the Tier 1 side, we made improvements in many things. As you say, here I already mentioned production operations, but developer experience on embedded side is very important. Our Tier 1 partners are developing applications either by themselves or they are using third-party app developers, so developer experience is something that is crucial.
We've taken meaningful steps forward on that front, and then naturally, in our partner care and overall service maturity, it's also a part of our product offering that has increased as we have moved on, and continues to be a very important focus for us in the second half of the year. We have enhanced our embedded security portfolio. You remember potentially that we made a press release in March, that we have signed up a new Tier 1 partner, and we are developing new embedded capabilities as part of that program. We've gone forward in significant steps in the second quarter in developing those additional embedded security capabilities.
Also, an existing partner of ours, AT&T, with their ActiveArmor app, which is their consumer security app they provide to their mobile users, or sell, and provide as a bundle to certain premium customers. The App Store ratings are now upwards from 4.4, so very, very strong, all the way up to 4.7, 4.8. So ActiveArmor is now a very liked application. And then at the end of quarter three, we will be releasing, as earlier advertised, our unified product offering for Lookout Life and F-Secure, combining the best of both worlds. And that's right on cue at this moment. So, that seems to be the... Both delivering on the schedule as well as on the functionalities expected. But more about that in next quarterly release.
And finally, on the driving further value into F-Secure business, we're expanding into new channels and partners. By far, our biggest focus right now in terms of more significant growth is on the Tier 1 side. That's clear. And on the Tier 1 side, communication service providers as the, in a way, the first domino that we want to take down. So, on that front, we have a really promising pipeline of additional partners that we're working with, and that is progressing at a relatively good pace, considering Tier 1 partnerships may take years and years to develop. But, we are happy to see that there are several who are considering their options right now. Naturally, nothing confirmed before we have ink on paper, but a lot of opportunities out there right now.
New verticals development is slightly slower than what we have expected. We have a good pipeline, but it's maturing very slowly. So compared to the Tier 1 opportunities, it's clear that new verticals provides us with growth opportunities, but slightly slower than what we see now on the major communication service provider front. Then, you know, we are now about 13.5 months from announcing the Lookout Life acquisition. So what's happened since? So in short, the technology back end is now out, in our own control since the end of May. So at the end of May, we took control of the technology back end that takes the feeds and source information from Lookout.
Lookout continues to serve us as one of our crucial partners in terms of providing us with threat intelligence and feeds that we use to provide services to our customers, in very much the same manner as with WithSecure. So we see that both WithSecure an d Lookout continue to be important partners for us in terms of providing info feeds and threat feeds that we use to provide services to our end customers. Our net debt at the end of June, now at EUR 166.6 million. I would... You know, I've talked about this already earlier in our quarter one results release, but the fact that we were able to sign up a new tier one partner, I would say, so quickly after the acquisition of Lookout Life, based on-...
A lead that had been worked on for quite some time already by Lookout Life was a good testament to the fact that we not only can continue developing the business that Lookout Life had, we can also take it to the next step. We've focused quite a bit on, you know, uniting our cloud services and supplier contracts and so forth, which has resulted in better operational development than we may be forecasting in the first half of the year, but that work continues. We believe that there is still more work to do on, in a way, operational optimization.
Oftentimes, when you talk about applications that are using cloud services, you want them to be as optimized as possible in terms of chattiness, how much they need to consult the cloud, and that's one obvious area where we are still doing work with many of our services. We are currently seeing that our planned synergies, cost synergies, and revenue synergies are going to be materialized in 2024 as planned. But to be honest, they are still relatively modest, but they are on plan. But that's about the Lookout consumer business acquisition. If I was asked today, was this a good move for F-Secure, I would say a resounding yes. Then, a few words as a reminder of what is it that we provide to our consumer customers and to our partners, to their customers.
This is a massive portfolio of services that we can provide today. Practically all of this is available through the Total application, and most of this or much of this is already available through embedded security modules. Our intention is naturally that everything is available on both Total and as embedded security, but this is also going to be affected by co-creation efforts that we have with our partners, which direction goes first, Total or embedded. But this is a very wide offering that we have these days, and if you compare this to, let's say, what consumer security used to be just five, six years ago, very much centered around device protection and Family Rules or parental controls, you know, we're way further now than where we used to be.
Lots of potential in the market for value creation. Now, in terms of the I talked about Scam Protection, so here are some of the capabilities that we have now introduced at the end of June. Shopping Protection on both mobile and desktop. When you enter a site, we give guidance to a user if it's good to continue or if it's a site which might be a cause for concern, that maybe not a good idea to proceed. That's now available on Android, iOS and on desktops. Banking Protection, the same. Creates a secure tunnel. No man-in-the-middle attacks possible in the device while you're banking. Native Browsing Protection, so when you are using either Safari or Chrome, anything and everything that you do with the browser, we are looking after you.
So if you're entering bad sites, clicking on bad links, we'll keep you covered. So these are browser plugins natively. Wi-Fi Protection, if you are connecting in a public place to a Wi-Fi, now we support iOS and Android devices and on roadmap, desktops, but mobile support is available already. So when you are connecting to a potentially risky Wi-Fi network, we notify you and recommend that you stay on the mobile network. And finally, SMS scam protection, based on our AI engine, will be available at the turn of September and October, both for iOS and Android. Then, if capabilities is one side where we have added new value for consumers and partners alike, the other area where we've done a lot of work already is the design of the service.
So, roughly 2.5 years ago, 2 years ago, we were realizing how difficult consumer security is to comprehend for end users. What we have wanted to do is to provide elegant, small signals in your digital moments while you're shopping, banking, messaging, and so forth, that the service is doing something meaningful for you and keeping you secure. If you check the little shopping basket signs on the 2 screens on the right, those are examples of the kinds of things that we are now doing. The same applies when you're browsing. It's showing every single time when you're browsing, if a site is good. If you're googling sites, it's showing you already in the Google search, which ones are to be trusted, which ones not.
So this is the way how we are weaving together, in a way, security into the digital moments that people are living... No need to go into a security product to know if you're secure. You will see it all the time, and this, we believe, will increase the perception of value for users. But that's all from me. And I would now like to hand over to Sari to go through financials with regards to the first half of the year.
Thank you. Good to see all of you. Let's dig a little bit deeper into the financials. Of course, Timo already mentioned many, many of these topics, but highlighting a few points. Looking at the revenue, so again, just reminding, last year we had Lookout Life during the quarter for one month, and now it's all three months. So this is, of course, explaining most of the growth and nicely then from next quarter onwards, the numbers will be more or less comparable. Organic growth was 1.9%, and currency neutral a little bit then higher as USD and Japan Yen were, we had the FX rates against us.
But despite of that, so Japan is a nicely growing market, not only thanks to the acquisition, but also organically, so there is good growth. In Americas, it's very much explained by the acquisition. Then you see here, Europe outside the Nordics. There you see very sort of flat numbers, and this is lower than you saw in Q1. Actually, we had a mistake in Q1, and Europe looked better than it is. So there was a mistake between Americas and Europe, and that has been corrected here and in the year-to-date numbers. So Timo already talked about the positive things with a good subscriber number development and average ARPU, which is positive in all regions. But then there are the negative ones with...
Where we have some problematic customers, and that's especially hitting this Europe basket. So good things in all regions, but the negative things very much concentrated to Europe. And we've mentioned U.K. and Germany as examples of these countries where we have declining customers. Then on the direct channel, so there the organic growth was remained flat, but there, as we've said already for a couple of quarters, the underlying billings development is positive. So now we are just waiting for it to turn into showing also the revenue numbers on the positive side. But the focus continues to be on retention. We've mentioned that we are not doing active marketing there, no paid acquisition, and that's why the new sales are declining.
And that's also, it's the same story on the Lookout Life side, so there, there even the billings is negative on the Lookout Life side. And in this picture, you see the share of Lookout Life, maybe highlighting on the direct channel picture there, it seems like the Lookout Life part is increasing, and that's related to this fair value adjustment that we are doing. So now the deferred revenue that came during the acquisition, it's declining every month. And now as it's more than a year ago that the acquisition happened, and that's sort of the now it should be all, all on, in our organic base from now onwards. So there, this feature that has increased the revenue from there, so that's disappearing.
So now it will be sort of more flat onwards, and again, comparable comparison numbers then from next quarter onwards. Then in deferred revenue, you see a decline. It's since the last quarter end, and there is now a mixed picture. So on the direct business side, it is growing. We have the growing billings during the quarter. And then on the other hand, so in the partner business, we have not had any, like, bigger lump sum payments or invoices. So that share, the black part in the pie chart, that has been declining. And a little bit to explain this, we added here, this is now not the, like, quarterly slide, but more of an educational slide, and as this picture has changed a little bit since the acquisition.
So, the bulk of the business is the lowest bar in this chart, so the monthly subscriber-based partner business, where billings and revenue basically are the same number. And this is the bulk of the business and no deferred revenue generated from there. Then the second biggest bulk is our direct business and also the retail business very much works in the same way. So we get the prepayment, and that is the revenue is recognized over the period of that prepayment. So there, the most of the deferred revenue comes from that area. Then, what is new and big with now the Tier 1 business and since Lookout Life, so there are some of these non-recurring engineering costs.
So basically, when we start the project, the customer is compensating for how we build up the services, and it can be a significant, like lump sum that we are then recognizing over the whole contract period. And now, for example, we've said that this new Tier 1 partner that was announced in March, that it has supported our revenue, so it is this type of payment that is there. So it is a fixed amount, basically, you see in every month. And then the bigger growth starts in the form of the monthly subscriber-based invoicing, which happens then when the business ramp-up starts.
We've had the startup fees also earlier in our like the old F-Secure, legacy F-Secure business, but they are typically small, and they don't sort of have an impact on this picture, and they are actually recognized immediately. So it's only those cases which are like several hundreds of thousands or even millions that are then that generate the deferred revenue. Then there are some cases also when it can be an annual invoicing or it can be an annual maintenance fee or something like that, that also is then recognized over a year.
These two middle parts here in the picture are, like, fairly small from the business point of view, but can have an impact on the deferred revenue, and that also explains why on the previous picture, the partner part of the deferred revenue declined. So this was just to explain the dynamics we have, as it has been changing a bit. Coming back to the quarter, in OpEx, even if our top line grew quite significantly, so OpEx is going down, and this is explaining the good result that we have in this quarter. Couple of things to highlight here. Sales and marketing being the biggest part of the cost here, so it's been impacted by this direct business marketing, where we really changed the way we are working since the beginning of the year.
So that's why this is declining. On partner side, no, no, like, major changes to the marketing approach. And then on the R&D side, so yes, our activity is continuing on a high, high level and, and all the things that, that Timo explained about, so we are spending also money, money on that. But a lot of that is, is now in, in the balance sheet. We are not trying to maximize our CapEx, I think the, the opposite, but, but there are things where, for example, this shadow stack from, from Lookout that we built, so that was a CapEx project.
When we are building this Total for Life, when we are building the solution for the new Tier 1 customer, so that is as well CapEx because they are used over a longer period. And as it's very much our still internal people who are doing this work, so then the OpEx goes down. And in this, at least based on our plans, we believe that the CapEx number sort of peaks during this quarter, and you should expect lower CapEx numbers during the remaining quarters of this year. So this is a significant reason for the good profitability in this quarter. About the TSAs, now many things are different compared to the same quarter last year, as many of the TSAs finished. So we had very small numbers remaining.
In admin, it's 0.1 here, but it's sort of close to rounding to zero, actually. That was finished, that was IT and related to the technology side, was finished at the end of May. And both in R&D and cost of revenue, things were finished at the end of May. So there is now a smaller part, which is very similar to what we have with WithSecure that is remaining, and it's sort of not black and white, that what is TSA and what is not. We have called it TSA, but very similar to what we have with WithSecure, what is remaining here. And now from then this quarter on, it should be very sort of flat numbers in this area, and then we don't need to focus on those anymore.
About the profitability first, starting with gross margin, very similar level to Q1, slightly better, and even if the difference is not big, we are quite positive about that. Why the number is lower than it was last year, it's the same explanations that we gave in Q1. So Lookout Life level is lower than the traditional F-Secure business. And we took over from WithSecure at year-end and lost some synergies that we've had in the past. And now we are on our internal learning curve to optimize both royalties and hosting. It's both line items that we are working on and trying to get...
We've gotten some better deals with our vendors, and we are also optimizing the solution so that we can have lower traffic, lower number of units that we are using. So, even though the turn is small compared to Q1, we believe that we are on the right track and feel that we've seen the bottom here. And in terms of the EBITDA margin, so just like said, so it is the lower OpEx levels that are explaining the good quarter and partly that is related also to the higher CapEx numbers. But, in terms of profitability, very good quarter. And, for the first half, maybe otherwise, as this is just adding the two quarters together, not going so much into this, but just highlighting on this, geographical split.
So here you see the right number for Europe and Americas after the two quarters. So here are the Q1 numbers that were wrong between those regions so has been corrected. Very strong quarter in terms of cash generation. In Q1, it was a little bit lower. Easter had actually a small impact on the last days of the previous quarter, so now we got the Easter money in here, and also otherwise it's been strong. On the other hand, in this quarter, we've also spent money as we had the repayment of debt and many other payments as well. And we even are using now EUR 5 million of our RCF. It's exactly for these purposes that we have that available, and that's for short-term purposes, as we ...
Here in June and July, we have quite many areas where we need the funds, but it's only for short-term. And as this was a very good quarter with cash conversion of over 120%, so this is obviously not the sort of a normal level, and you see that there are quite many changes between the levels of the quarters. And leverage numbers going down. Of course, our target is to be below that 2.5, so there is still a way to go, but it's the right direction, and equity ratio gradually improving after paying the dividends in Q1. Guidance, no changes. We know very well that maybe especially the top line guidance is quite broad, and at some point we will certainly come back to this.
But so far the message is that the same guidance remains, and we are well between the brackets here. And just for information, of course, you know already when the third quarter is due, so that's 24th of October. But also save the date for the investor day. We are planning to have that on the 20th of November. So at some point there will be, I think, a release about that as well, but that's our current plan. That's all for the presentation, and now we are with Timo, ready to answer any questions.
Hi, it's Matti Riikonen, Carnegie. Couple of questions. Regarding the sales miss with the long-term partners that you said in the partner channel, that sounds like a kind of a bit worrisome turn of events. Is it so that the customers are leaving the partners, so they discontinue the security service, or are the customers also leaving the partner service? So are they losing kind of Total subscribers on the partner service?
They are losing customers as a whole.
Okay.
Churning customers.
So customers are churning, and then your service is basically going in the same-
Yes
... same route?
Yes.
Okay.
Maybe highlighting here also, this was the first time we wrote that, but it's not the phenomenon of this quarter, but it's been ongoing. I think we have mentioned it a little bit earlier that the lower growth is always a sum of positive things and negative things, and this is exactly the negative thing. So it's not for this quarter, but it's been there already for many, many quarters. A little bit different stories behind, there are maybe a handful of these customers where we have challenges.
We have maybe 40, 50 more sizable partners in the world. I think it's quite natural that some of them are sometimes facing a bit more challenges in their core business, and this is the case here.
Right. Basically, the other operators in those specific countries that these large partners operate in, they are not your customers, or you are not seeing an influx of those customers basically turning up at some other operators in network?
In short, no, we're not seeing that, so these are leading partners in the countries where they operate for us.
Right. Okay. Then, you mentioned again that there was some sales contribution from this Tier 1 client that you, that you got, and the service is only starting in Q4. So I'm assuming that the revenue that they are getting is- that you are getting, is prepayments or milestone payments or something similar. Is that?
It's non-recurring engineering. So, you could, you could call it implementation fee, which we start recognizing from the moment when we start the project until the end of the contract tenure. So it's recognized over a longer... over years, let's put it that way. And that is the money that we have now generated. License or subscription-related fees are due later when the service launches.
Sure.
That was the second line on my educational slide, the NRE line, so it's that type of payment.
Yeah. Does it cover all your costs, or how... What kind of impact does it have on your margins, if any?
I don't want to dig deeper into that, because I feel that that's a little bit of a competitive piece of information also. But let's say that as we need to invest heavily into development of something completely new, it certainly helps us to make that investment, and we don't have to carry the whole brunt of that investment on our own. That helps us.
Maybe, as I said, that there are some CapEx projects related to this, so we have some costs for building the service. But what this NRE fee is, it's of course a question of the commercial negotiations, and it's not sort of a... There is no direct connection, but it's a result of what we've agreed with the customers.
What parts of this non-recurring engineering have to do with generic R&D that might be capitalization? If it's something that is completely specific to this case, then not.
All right. Then you mentioned about technical independence that you achieved in the quarter, but still you are incurring those TSA costs that relate to information fees and some service fees from Lookout. So could you just a bit more in detail go into the technicalities so that you explain that it is the kind of back end that, as you said, of running the service that is totally in your hands, but you are still getting some information which is about to last couple of years. Is that according to plan? So was that supposed to happen this way in the first place? And then exactly what is the service that you're getting, and what is kind of the mechanism that ultimately you will have also that in your own hands? How will you kind of build that capability?
Was this according to plan? Absolutely, yes. This, this is precisely how it was supposed to go. And for security service providers, be they on the enterprise security side or on the consumer security side, everybody takes certain feeds from third parties, either to complement their own threat intelligence or provide feeds that they don't have themselves at all, and doesn't necessarily make sense to develop in-house. And certain areas that Lookout is very, very strong at is, for instance, mobile security feeds related to specifically Android area. I don't think there's anybody better in the world than Lookout on that front. So it makes all kinds of sense for us, in the long term, to take the feed from them with regards to, for instance, Android related threat intelligence data. And that's not something that we intend to break off in a year or two.
It makes sense in the long term, while we focus our research on other things where we see that, you know, we have a better chance to be unique and competitive.
This technology, TSA, was in the beginning, it was split into two parts, and I think we've had pretty much the same schedules that some last until May and some for a longer period, and that has not changed. It's not like... It's a very similar relationship that we have with WithSecure, and now we've just made the contract a year ago and agreed that it will last for years. So I think that probably next year reporting, we don't mention it as TSA because it's sort of definitely less of a TSA nature than the ones that we're finished now.
It's a business as usual.
Yeah. We just made an agreement about that a year ago.
Right. Very good. Then also you mentioned that your admin cost will increase due to the Tier 1 capability build-out, and I didn't quite understand that how is your admin cost increasing because... Well, I just didn't understand what that means. So could you explain that in practice?
Yeah, yeah. I think it was not that it will, but it has increased, so I think there was sort of similar relationship to how the top line has developed. And there are things like, we have strengthened our cybersecurity team, sort of the CISO Office. We have more, like, legal capabilities in the U.S. and actually also HR type of capabilities in the U.S. And, so there are things that are around this being more Tier 1 focused and ensuring that we have the maturity for that. So not directly, like the acquisition-related, but it's about building the capabilities. It's not that we would, in general, have more IT support people or more accounting people, but it's for specific purposes. And I think we have already reached the level.
And actually, there is something that actually goes even to management. Compensation is also in that line.
Okay. And that cost or that capability increase is basically for the whole Tier 1 offering that you are about to build in the in the next couple of years' time, it's not just related to this one particular customer-
No, no-
-or service?
... it's general capabilities.
Correct.
Absolutely.
Correct. Yeah.
Right.
The readiness, the maturity.
Right. Okay, thank you. I have nothing further at this moment.
Hi, it's Atte Riikola from Inderes. First, about your growth outlook. I think you mentioned in Q1 that you see some signs of improvement in your market situation. So how would you describe the market situation development in Q2? Is it going still in the better direction, or how do you see it?
It's carefully positive. That in short. Carefully positive. We're not seeing any downward trends, specifically, anywhere. We're not seeing any, you know, bounces up either. But, you know, in a way, the more negative sentiments that were very, very obvious, like a year, two years ago, are not necessarily there as strong. This is maybe the new normal now. So that's what I would say.
Yeah. You mentioned already that your sales guidance is pretty broad nowadays still, but... You might update it later in the future. But is it the reason why did you not update it right away because of those challenges with some of those customers in Great Britain and Germany, or Is there some other reason?
I think the question is that because we have the positives and we have the negatives, that what is the balance of them? And when we narrow, so yeah, what is it? Is it the same midpoint or is it something a little bit different? So it's playing with the numbers and how to get it right. So I think it's sort of uncertainty about the details as there are positives and negatives.
I would also add that, as we're working with some, you know, on some additional cases that we're working to win, you know, they may also affect unexpectedly, you know, positively. But we have absolutely no certainty that anything like that will happen. So, we are definitely waiting for a moment when we have better visibility to make any changes into the guidance, if we do so.
Yeah. But we were expecting this discussion, so of course it's something that we are also thinking about a lot.
Mm-hmm. We are also still only 13.5 months from the Lookout Life acquisition. We're only two years from becoming an independent company, so there are also cost factors in there that we are busily optimizing, and not all things are very precise yet. We're seeing good trajectory, but we still need to verify that to be able to know, because it's got the revenue and the cost. So there are certain things still there that we are not certain enough to make any changes.
All right. And then about Lookout Life, you already mentioned on your presentation some achievements that you have done in the past year. So let's ask, what have been the biggest challenges you have faced during the journey this far?
Yeah. I would say that maybe the biggest challenge for us has been that, you know, a company like Lookout has worked with certain partners for a long, long time, involving sales people, support people, solution architects, developers, and so on and so forth. And when we acquired the Lookout Life business, not all of these capabilities were part of the transaction. So there have been areas of operation where we have had to build it up from scratch, practically, while the airplane is in flight. So that has been a challenge.
I would say that, you know, if you look at the kind of partners that we have typically served versus very big ones, you know, the very big ones that Lookout Life had have a very high, very high SLA requirement or service level requirement, and we've had to build that. You know, that has had its challenges. I would say that's the biggest one. And overall, business-wise, we are seeing that we are slightly below our expectations, but it's not something... There, there's no one single thing that we could say that by switching that lever, we could do better or so. But I would say overall, like I said earlier, that it was a very good move for the company.
One thing I would like to say that you didn't ask about that day, is that size does matter for F-Secure. So we have been a relatively small player in the worldwide consumer security market, and by making the acquisition, we have clearly now taken a step up in terms of revenue, and that needs to continue. Now, we have been able to show growth numbers through the acquisition, we naturally want to move to the position where we can start showing organic growth, both from the Lookout Life partners that existed, as well as on the F-Secure side, and new ones that we're hoping to win or working to win.
Okay, that's all from me. Thank you.
Thanks.
So let's take some que-
Hi, it's Matti Riikonen again. I have a couple of additional questions. First of all, technical questions related to the deferred revenue that you booked as kind of part of the deal with Lookout. When you said that the deferred revenue impact is kind of coming to an end now that one year has lapsed since the acquisition, does it mean that your reported growth numbers could increase by that amount, which has been kind of deducted from revenues this year. That's roughly about, I would say, 1%.
Yeah. On the DB side, the acquisition impact will disappear now because it's basically the maturity, duration of the subscriptions is below a year. On the partner side, there will be a very small share remaining from the it is the AT&T and NRE that was paid years ago to Lookout Life, and that lasts still for some time, but that impact is very small. So roughly comparable numbers.
Right. Okay, that's good enough. Then one question about the ratings that you receive in kind of independent tests for your software and service. Has there been any new kind of tests done? And if so, how have you scored? Are you still paying attention to that? Is it kind of discussion point with your operator partners? How does it look at the moment?
We are not as active on the test front as we have been. When you want to score well in these tests, it's actually a sport in itself, and you start, like, sub-optimizing certain things to score better, and that effort is away from actual research that might be much more core and much more valuable to users. So, nobody is able to tinker with results or fudge, you know, certain things to just look better, but that is a lot of effort, and we have now focused much more heavily on scam research in our efforts, instead of optimizing test results. So that's something that has happened in the background. We've scored well overall in the past six months, we've scored well. So we don't see reasons for worry on that front.
We're even getting, like, best scores in certain categories, not all, but in many. So no worries on that front. We are making certain technology platform changes in our new generation product coming out at the end of September, which will most likely create better customer satisfaction overall.
Is it so that the kind of your channel partners do not feel that that is the, that is the decisive factor when they choose a cybersecurity partner for their consumers?
They do have a look at those kinds of things, but they test themselves, too. They don't, they don't just trust the commercial players who are testing products. It is one source, but when we are working, let's say, with tier ones, they want to do their own tests, and we need to pass those tests. And those have to do with: How does the product perform against what it says on the tin? And secondly, there is another area of compliance, which is very important, that Sari referred to earlier, which is cybersecurity overall. How do we run our service in a way that it is cybersecurity-wise solid? And that's equally important for the major players, as is the product quality itself, and that it delivers on promise.
Okay, thank you. And then, finally, on the hosting costs, now that you have already made some of the hosting cost changes, and I suppose you wrote that there was some impact also in Q2 already, how do you see those costs developing going forward? Is it... Should we expect that there would be a kind of further decline in those costs, or is this the plateau that you have reached, and then nothing more to expect?
Yeah
From that point?
Well, definitely, we have expectations that the gross margin would improve, that we've found and learned things during the quarter. Now, it was just 0.2 better than in Q1, but we see a lot of potential because we are learning things all the time, and we are optimizing our product. And now that we just, as of beginning of June, got the Lookout side to our own hands, so that's also another milestone from where we are starting to optimize, so definitely we can improve.
All right. Thank you. I have nothing further.
Thank you.
So let's take some questions from the chat. We have quite many questions on the declining revenue of some of the long-time bigger partners. Could you elaborate a little bit on this one? Should we expect this trend to continue in the coming years, and can you give some color on the magnitude in euros of this challenge?
I leave the magnitude to Sari. If this is going to continue for years, I certainly hope not. Nobody knows. The reality is that, you know, companies sometimes grapple with their finances and with their business. Sometimes they deal with that relatively fast, it may take only a few quarters. Sometimes it may take longer. So that remains to be seen. We have no further understanding how long these challenges may continue.
A nd of course, we are trying to sell, because these are customers who have not decided to upgrade to Total and be in general more active than what they are today. So of course, we are trying to change that as well, because improving with existing customers tends to be a good idea. About the magnitude, so not going into details, but it seems. So altogether, these customers are many millions. They are really, really significant, and that's why the positives from Total are almost offset by these. And of course, it's not the same numbers every quarter, but it is a significant impact that we are having.
There's one follow-up on these old partners who have not upgraded to the new Total. What are the reasons behind that? Are they just not interested in Total, or how do you see it?
Yeah. One big reason is that they have bigger fish to fry, right? If your own mobile subscriptions or broadband subscriptions are going down at a fast pace, and you're experiencing churn, then that's by far the biggest reason over there. In terms of why not upgrading to Total, they have improvements that they want to implement for their core services that may have to do with customer management, product management, their digital sales channels, and so on and so forth. So there are other things on at the top of their IT agenda that are taking all of the bandwidth of the organization, and they have no capacity to introduce other IT-related upgrades, because that's what's needed when you go for Total.
Not massive, not big in any way, but it's still an effort that is required, and that's not the bandwidth they don't necessarily have. But, you know, for instance, one of these partners is currently showing strong interest for Total because they see that while they are suffering from churn, consumer security actually improves retention. So they are drawing a conclusion that actually this may be helping them also in their core business.
Thank you. Then to the combined Lookout and F-Secure offering that will be launched in Q3, can you give us some color on that one? And also, what is the difference between the Total launch in June and the new combined offering?
So, if you go and have a look at how the design and the user experience looks like in the June release, the design element is already very much alike what you will see at the end of September. But in terms of functionality, there will be big changes in the VPN service, and there will be big changes in the identity monitoring and password vault experience. The VPN service, in a way, the engine is completely re-engineered and changed to be more high-performing, more reliable, less latency, more choices of different geographies and connections that you can have. And then on the password vault and identity monitoring side, those two services will be merged together.
So whatever you enter into your vault will automatically be monitored, so that you don't have to enter credentials or passport numbers or driver's license numbers or credit card numbers separately into identity monitoring. Anything that you enter into the vault will automatically work in terms of monitoring the dark web. So we're starting to see real, in a way, synergies between the different functions of Total working together for the benefit of the user. Those are maybe some of the bigger things that are to be expected, in addition to some further design improvements. Overall, another thing, you know, I mentioned that 2 years, 2.5 years ago, we realized that consumer security is too hard, so we need to show what the service is doing.
Another element is that if the service is super quiet, people don't necessarily know what to do or what the service is doing at a given moment, so the service will engage more with the user. So there will be more guidance, there will be more insights, there will be much more, in a way, information that you will see about your specific, what is called security posture, how secure you are, and it gives you guidance on how to get better. So these are the kinds of things that you can expect.
The challenges in Poland, those have continued for some time. Is there any signs of the headwind easing or recovering in some way?
Yes. Thank you for the question.
The standalone Lookout organic performance in Q2, could you remind us, should we expect a negative seasonality effect in Lookout in Q3? So how was the Lookout standalone organic growth in Q2, and could you remind us on the negative seasonality impact in Q3?
In general, there is no seasonality. We see in our business that Q4, in terms of billings, is a little bit better and thus also typically a little bit better in revenue. We have disclosed indicative numbers for Lookout Life, and I feel they are quite indicative, so we're not paying so much attention to those.... but it's been declining now lately, and with the direct business being a key driver because we have not done marketing on that.
If we look at the R&D expenses, they have been on a quite high level on 2023 to 2024. How much of the increase is attributable to Lookout acquisition and following integrations/new product and product related to the new offering?
All increases are related to those things that you mentioned. So, we've had... There was something that was due to independence from WithSecure, then there's been investments due to building this shadow stack after Lookout Life. And now we are building Total for Life, and we are building for this new Tier 1 customer. So everything is related to these things that we are talking about.
I'm actually very happy that we're investing heavily into development. We are a technology-driven business, and that technology does matter, and the more we go after big partners, it matters even more. So, I think it's been a good level of investment. It may or may not ease off somewhat towards the end of this year. But you know, if we have new commercial successes, maybe we push the pedal even more.
Let's take final question. Would you consider doing any M&A transactions during the rest of the 2024? If so, what kind of targets?
Don't look at me, Sari. You go for it.
Yeah, of course, we always keep our eyes open, but it's clear that we have a low equity ratio and high debt. So it needs to be something that is really worth taking the effort and looking for the financing, how to do it. So could be something small. Something big would need to be really something significant, of course.
Thank you. Those were all the questions.
Thank you.
No more questions from the room, I assume? All right. Thanks, everybody, for your questions. It's always nice for us also to get feedback, and the questions also guide us to the kind of matters that maybe require more clarification in the future. But thanks a lot for attending. Good to have you with us, and if not earlier, we will see you in the third quarter release session in October. Enjoy the summer.
Yeah. Wishing you a very nice summer. Thank you. Bye.