Hello, everybody. My name is Timo Laaksonen, Chief Executive Officer of F-Secure. A warm welcome to everybody to our half-year financial report for 2022. We are doing this for the first time as an independent company, so an exciting day for us from that perspective. Why don't we move forward? Starting from our agenda. First, we'll go through the highlights of 2022 first second quarter. We'll talk a little bit about the group development. Then we'll go through financials. Our CFO, Sari Somerkallio, will do that for us. We'll recap the latest on our outlook and financial targets, and we'll finish off with some concluding remarks. We have some people in the room over here, so when there are questions, don't wonder if I'm looking at the audience over here.
Then also online, once we get at the end to the Q&A, please post your questions, and we'll have a person who will be taking on those for you. Let's get started. Highlights of quarter two. We continued our growth in the midst of massive changes in the company, and I guarantee you that it has been touching everybody irrespective of the unit or role that anybody has had in the company. It's touched every single person. We've continued to grow, and we've made several strategic advances. Our revenue in the second quarter grew by 4.3%, and we saw that we had quite solid demand for our products continued, and we also got a little bit of help from a strong dollar, but that was a smaller factor in the larger scheme of things.
We continued the execution of our growth strategy. I will recap that again in a moment. Also, we had time to focus on our operational excellence and, for instance, setting up the business infrastructure for us in the future as an independent company. The partial demerger that we've been working on for quite some time now, since the end of last year, was successfully completed, and we are now capable of fully utilizing our independence as a company and drive growth through investments in the areas where we need those most. A very important highlight after quarter two is that our outlook for the year and our financial targets remain unchanged. No changes on that front, which we consider to be a good piece of news.
In quarter two, we were creating a strong foundation for growth, and our revenue grew to EUR 27.5 million by 4.3%. This was thanks to very good commercial activity, both on our partner business side as well as in the direct business. Our partner business grew by 4.3% and direct business by 4.1%. Our adjusted EBITA decreased to EUR 10.1 million, which was 36.7% of revenue from earlier, and this was due to the fact that we've been already making significant investments into our independence and growth during the second quarter. The profitability in the second quarter was especially burdened by investments we made in sales and marketing and R&D. In this respect, these are investments towards future growth.
In terms of revenue breakdown, actually precisely the same breakdown as before. 79% partner business and 21% direct business. No major changes in our geographical split. We've seen nice growth in North America, not only organically, but also helped by the strong dollar and in our rest of the world area. The demerger from WithSecure was completed on the twelfth of April. The WithSecure board of directors appointed the President and CEO, myself, and our management teams for F-Secure. On the thirty-first of May, our extraordinary general meeting decided that F-Secure will do demerge through a partial demerger. On the thirtieth of June, we were created and established as a new independent company.
On the first of July, we started trading on Nasdaq Helsinki. Our strategy for continued profitable growth. No changes here since what we've already presented in April at our first quarter results session or at our capital markets day early June. In these aspects, the rollout of our new generation product offering called Total went very well in the second quarter. We now have a good number of partners already live with the services out there, and we have a double-digit number of partners who have already signed up for the service. That's moving along well to drive our increased ARPU, and some of these are the biggest partners we actually have.
In the development of our current offering and the new products, we came out with a brand-new version of TOTAL three at the end of June. That was a good step forward once again. On Sense, we built a partner program which will allow us to scale the business faster also through reselling Sense in the future, and we signed up several new partners. These partners are from our traditional communication service provider segment as well as retail and insurance. Expanding into new channels, as I already mentioned, new partners signed up also in retail and in insurance is making sure that we're making progress on that side. We're just about to get ready to launch our Total services through an energy company in the Nordics very soon now.
That's all from me, and I would now like to invite our CFO, Sari Somerkallio, on stage. Sari, over to you.
Thanks, Timo. Hello to everybody. Now let's look into the financials, some repetition from what Timo already said, but I try to point out the most important things. Here you see the split of the partner channel and direct channel revenue. Well, similar growth rate in both of them, so 4.3% in partner channel and 4.1% in the direct channel. Maybe just building on this direct channel, a picture of the deferred revenue. Just reminding everybody that in the direct channel, people prepay their orders for the longer period, so part of that always becomes deferred revenue and is not immediately visible in our revenue numbers. Here the growth is 4.7%.
This is not entirely e-com, but mainly e-com, so it's a good thing that this growth number is bigger than the revenue that you see in the sales. Looking at the geographical split of our sales, the shares were already presented in Timo's part. Here the growth rates, North America is there we see the biggest growth, but part of that is driven by the dollar, but also the organic growth is good there. Also rest of the world, which is Asia, so in practice, so nice growth there. Nordics doing well. In Europe, very similar to the story to what we said already in the first quarter. There, Poland is the biggest market that is burdening us due to the regulatory change.
Well, we cannot say how much exactly it will take time before this Poland situation changes, but it will take long time because it's related to the churn of the sort of existing customers who were customers before the regulation change. Looking at our operating expenses, we see here a big increase, 18%, and of course, that looks quite dramatic. Some of it is phasing, but this is really about the changes we are making and building our future, partly for the future growth in R&D and marketing, but then also to our competencies to be an independent company, and that part is also visible in all the functions. This kind of change rate, 18%, so that will of course not continue.
Still we are ramping up during the rest of the year our own competencies. The costs- Items Affecting Comparability, so the costs relating to the listing, so were EUR 3 million in this quarter. There were some IACs last year as well, but this is EUR 600K higher than at that period. There is just for everybody to remember, there is a reference to the TSAs. TSAs were not the factor in this quarter, but is a big factor for the second half of this year, and similarly they will continue impacting us in 2023. We had some material and numbers about this in the Capital Markets Day, and the story has not changed at all.
During the rest of this year, it is a number around EUR 9 million that we are paying for these TSAs. A smaller number in 2023 when we are gradually getting rid of those, but 18 months is the maximum period for those. Looking at the profitability, on the left-hand side, we see here the gross margin. That is a lower number than what we've been used to. Cannot say that this would be a trend. We definitely want to be and will be above 90% in the future. We know that we are losing some synergies in this area as well as part of the demerger.
In that sense, short term, the pressure is more down from that previous 92 level, but definitely we want it to be above 90%, and we will pay, of course, additional attention to this and its development. This is also an area where we still have TSAs from WithSecure, so there are things that we are doing still together. In terms of the EBITDA margin, like Timo said, definitely a low number, this is around 30-37%. Still, things go according to our plan. As you saw, we are not changing our guidance. The full year we still expect to be around that 40% EBITDA. The areas where we are
Yeah, we're building in all areas and R&D is more about the growth and the other areas are more about the independence maybe. The balance sheet, this is now maybe the biggest news here. First time we are really having our own balance sheet. All the other numbers in this report are still based on the carve-out and to our time together with WithSecure. This is now from the evening of the thirtieth of June, so our real own balance sheet. It looks a bit different compared to, for example, what we looked at in the Capital Markets Day. Maybe just highlighting some of these changes. If we look at the assets, the non-current assets, there is a receivable from WithSecure.
As part of this arrangement, we did this asset transfers in the countries, and they were going both ways depending on where we for whom we established a new company. There is a receivable there. Then also on the asset side, there is the blocked collateral receivable from WithSecure that is in practice cash and which we are transferring to us during July. That receivable and the cash and cash equivalents that's what you can consider as cash in real terms. Then on the other side of the balance sheet, the new items are the interest-bearing liability where we have two things. It's leases which were not in the balance sheet earlier and also then the payable to WithSecure.
That is the big difference to what we saw in June when we are looking at different types of balance sheets. Now we have a good reference for this. Maybe about these receivables and payables between WithSecure and F-Secure. For them, there is a term of three years, but there's a prepayment option, and we will now discuss with our colleagues on the other side how and when we do that. Not agreed, but it's max three years. Still no loans from banks. We have the RCF, but we have not used any of that limit. Just briefly about the first six months of this year. 4.2% was the growth.
For EBITDA, going from almost 45% last year to 41.5%, which is a mix of a very good first quarter and now the lower second quarter. Outlook totally unchanged. We go with the same what we said in June and are comfortable with this still. Also same thing goes for our financial targets. Nothing changed here. It's continue with the same message. This was the financial side. Now I hand over back to Timo for some closing remarks.
Okay. We're now stepping into a new era for F-Secure. We've been in it for about three weeks now. What we're about to see is what I call a flywheel. You know, it takes a little bit of time to get the flywheel into full motion. We're now giving it the first pushes to get it going through our first investments, both into independence and into growth. We absolutely aspire to be a market-oriented company, fast-moving company with the capability to invest into growth. Growth is definitely there in addition to the strong profitability that we've always shown. Secondly, we have an ambition to be the benchmark in the industry for excellent security experiences, both towards our partners as well as the consumers out there.
We now have roughly 370 people focusing on one thing, and one thing alone, which is consumer cybersecurity and developing our offering. Focus has always shown that, you know, give it a little bit of time, and the results will be better. That's what we're also looking at over here. Finally, we are hoping that from each quarter to the next, we will be accelerating our strategy execution and naturally create shareholder value. This is all we have prepared in terms of material for you, and now it's time to go into Q&A. If we start from the room over here, we'll have a microphone that passes over here, whoever has questions for me and Sari. Please.
Yes. Thank you. Veikko Silvasti from Danske Bank. Let's start with the problems with the regulatory change in Poland. First of all, can you describe how large share of your revenue and the proportion of your customers are from Poland?
We're talking about a single-digit number as a whole in our revenue. It's been a good country for us, and it continues to be a good country for us. I believe that we talked a little bit about this at our capital markets day. The change in the regulation means that any service provider has to ask for the consent of the customer to get a certain service. Previously, they were able to prepackage certain things with their subscriptions, for instance, the mobile or fixed broadband services. That is the change. As there is churn, leaving customers may have a very high rate of security activated for them. New ones coming in, which typically replace one for one, have to make a definite choice to go for security. That is the regulatory change.
Yes. Clear. Single-digit number, and then do you think that there are similar kind of regulatory changes coming in other geographies?
No. Other countries have already applied those, and Poland is maybe a little bit behind other countries.
That's good to hear. Maybe on the gross margins, down almost 2%, 1.5% year-on-year. What's behind this now that of course you lost some scale, maybe some scale benefits, as you demerged from WithSecure and so forth. Does this mean that the hyperscalers are asking for higher prices for their computing power?
I think this is about our internal process efficiency and we know that you can optimize different things and the focus has not been there during this quarter, and this is what we then need to look into and ensure that we are also working actively on this. I think this is an action point for ourselves to monitor this development. We should not accept this going forward.
Yeah. There's no major increase in the hosting costs? Great. How is the recruiting going, especially in the R&D side? Is the market tight or at least there has been a lot of layoffs from the hot startups or scale-ups. Have you seen any kind of relief in the talent front?
We've actually gone according to plan. I would say that in terms of recruitment, so far so good. I would say that it's been very reaffirming to see that an independent consumer-focused F-Secure is an interesting employer from people's point of view. This is on all levels, on experts, managers, leadership. It's been a good experience so far.
Great. Few final questions. First of all, on the competitive landscape, have you seen anything changing? Has there been any Russian players? Have they been big? Have you captured the market share from that? Also, what's going on with the NortonLifeLock Avast deal? Have you captured or seen some opportunities to take market share?
Okay. Overall, everybody knows that Kaspersky is a Russian cybersecurity company operating both in B2B and B2C sides. There's been a lot of market movement around that. In the direct business, there is heavy campaigning going on from all consumer cybersecurity companies to capture some of that market share. We've got growth through that, for instance, in Central Europe. On the same token, I think we've talked about this to a certain extent before that Kaspersky has known to be rather aggressive on pricing. You know, there is only so far we want to go in terms of pricing. We want to still defend profitability. We've had some competitors who are going extremely low in their offers to capture some of these customers.
We have not been willing to go as far, but we've got our fair share of that to ourselves. Finally, there's been partners who have been partnering with Kaspersky in the past, and we've won a number or signed up a number of those partners in the last year. It didn't start from the twenty-fourth of February. It started already earlier, maybe a year ago. In the last year, we've signed up a number of those partners onto F-Secure.
Positive traction on both partner channel and then direct channel?
Yes.
Great. And then finally on the balance sheet and cash balance and so forth. Now it seems if we take into account the money that you will receive from WithSecure, you will be at net cash already after your first quarter. Now going on for the rest of the year, your net cash will start to accumulate. Obviously you're a business that can carry net debt. Thinking about your dividend distribution, can you give any guidance on what kind of dividend you are going to announce on the Q4 report?
Yeah. We have not had that precise discussion in the board, so I don't have a number. Of course, our policy says that it is around or above 50%, and the question is at how much above you can go, and for that, I don't have a number. I repeat what I've said before, that we recognize that we should not be a bank. Either we find use for the money or then it belongs to the shareholders.
Clear. Thank you.
Hi, it's Atte Riikola from Inderes. First, little bit technical question. Do you still expect some non-recurring items in your EBITDA in H2?
No IAC plans anymore, so we've done the project now, and now it's operating cost.
You said that you have signed new Sense partners and you're upgrading your partners to the Total package. How is like the ramp up for those partners? How long it does take when those new deals are going to be visible in your revenue growth?
Some of the new partners we've signed up in quarter two will already launch towards the end of quarter three, so those are very quick. Some of them will be as late as quarter two next year, so it varies. I would say that maybe most of them within four to six months of signing. It does take a little bit of time. Some effect already to this year, but especially it's driving our growth in 2023 and forward.
All right. Maybe last question about your sales and marketing cost. They took a pretty high step up, so was there a like some kind of one-time marketing campaigns or something like that on Q2? Or is this the like new run rate, what we're seeing in Q2 results?
I don't think it's exactly the run rate. We have, for example, worked on a brand renewal that there is some cost related to that, and it's partly about building the organization as well.
We've previously worked with partner marketing team and a direct business marketing team. Now we have set up a corporate marketing team which acts as the engine for all. We've had to hire strong people to drive creative content, all of that, to serve the whole business and also have company visibility in its own right. We made investments in marketing more than we would do typically. On the sales side, we've gone on strengthening, you know, case by case in different regions.
A combination of something that was done this quarter and something that is more permanent.
All right. Thank you.
Hi. Felix Henriksson, Nordea. Question regarding sort of more about the macroeconomic backdrop and consumer confidence. Obviously, we've seen a number of consumer-focused companies struggling with demand and issuing profit warnings and so on. Just so just curious just to hear about your thinking around consumer cybersecurity and sort of in the face of an economic downturn. When you look at your sort of key KPIs, whether that's number of subscriptions, ARPU or churn, have you sort of witnessed anything that would point to a slowdown stemming from the sort of macro backdrop that we are seeing?
Short answer, no. I've been reading the same articles as you have, Felix, and it's obvious that there is quite a lot of nervousness in the market. Fortunately, we're operating in a market which is needed in any kind of economic turn, up or down. We're also very happy about the fact that in 2020, we think that we saw some boost from COVID and the remote work becoming more apparent and you know, the norm rather than an exception. That drove some of our growth, but it's continuing. It wasn't just that. We're way over that initial wave of demand that we saw, and it is growing still, and it is looking good.
The short answer is we haven't seen reasons to be worried.
Okay, good. That's good to hear. Perhaps just a clarifying question on your cost base and the sort of annual level of EUR 4-5 million of extra cost that you're sort of looking to incur from becoming an independent company. How much of that is sort of in your numbers already, and how much is to be added on the second half?
Yeah. The guidance we have given for this year includes those investments, and I think this year we will be going over that EUR 4-5 million because we have a little bit of this double cost. We are doing our ramp up of the competencies and then at the same time we are still paying for some services for WithSecure. I think that during the latter part of this year, so we'll have all that cost in our books. It's about the balance, how we gradually then get rid of those TSAs. Of course, that EUR 4-5 million is a number that will at some point when we are growing, so then we of course need to invest also for the growth.
At some point that number will be outdated, but I think it is still a good number.
Good. That's all.
Hi, it's Matti Riikonen, Carnegie. Couple of questions. First about the gross margin and when you talked about the inefficiency in basically doing the things that you need to do in either to run the products. What exactly has happened when you talk about less efficiency? I understand that there's some synergy loss, but in real-life terms, what are we talking about? What kind of inefficiencies are you facing?
Just to get an idea.
Yeah. Yeah, I'm not the technical person to go through all of that, but I know that when we are working on the cost of our revenue, those items, so they are different things, and it is one team who is working. I know that they have. They are always focusing on optimizing something, and now the optimization has not been on what is most of our cost. This is part of these things that we do together with Secure. Now we need to ensure that we get our fair share. Of course, that is also partly moving over to us. This is an area also where we are building our own competencies.
Is it related to your team basically buying external services and then maybe not always looking at the cost so carefully?
Yeah. Also things that are happening on the WithSecure side partly in that our common team, our common technology team.
This is one of the areas where we need to build a capability to optimize the cost ourselves, and we've relied on the common functions to do that for us.
Yeah.
This is a small hit that we've had to take.
Yeah. I would not be blaming them. It's a question of these are part of the reasons why we have de-merged so that we get the focus.
Right. Basically, F-Secure charging you more than earlier related to things that are less important to you or if your headcount hasn't increased among the people who do or manage the services so that the gross margin cost of goods sold. I'm just puzzling with the idea what kind of costs have there increased. Is it more people that I understand that would be a permanent cost, more kind of external consultants or whatever services that you are buying?
It's a combination of purchases and how you are using the workforce, and it's a combination also of certain allocations done there and yeah. It's a mixture of things, and this is where we need to improve also our own understanding and the transparency into that.
Okay.
I know this is not a very good answer, and we are maybe not happy with the situation either fully.
Is it something that you think you can basically get it fixed fairly soon, or is it something that you will need towards the end of the year that you are managing that?
Yeah. This is something that we are discussing with our colleagues and we have not changed our plans because of this.
Okay. Regarding Poland, do you think that the situation with the regulation change, I mean, normally you would expect it to have an influence on the numbers for a year, and then of course the comparables become easier. Is that what you're expecting or is it going to be longer than that, so it's a permanent challenge that you have to face or solve somehow?
I believe it will be a longer challenge because it's depending on the churn of the old customers, and that they don't churn, like, in a year, but it takes years. We have as long as there is this big chunk of the old customers with the old contracts or old subscriptions. The base changes according to the churn of that lot of people.
Right.
It is a longer-term drain, unfortunately, but it gets smaller. It should get smaller by the quarter as the customers who might churn quicker who have had security get smaller all the time. We're also working in Poland very actively, and I trust the local team that we can also counter this and turn the tide through other measures. We're not just watching from the sidelines how there is a drain. There has been work going on very actively for the past 12-18 months to turn the tide, and we're looking forward to having good news on that front soon.
Okay. Theoretically, the worst case is that you lose all the single-digit million EUR revenue, and then best case is that the loss will be smaller.
I don't see any kind of possibility that we would lose all of that money, seriously. It's a very security-minded partner set that we have over there, and they've done a very good job along with our own team in providing security services. That's not going to melt completely. That's not going to happen.
Okay. Regarding the TSA agreement, I think that's the at least for me the biggest challenge to think how will your cost base develop in the second half this year and next year. I can fairly well understand that in terms of administration costs, you will ramp up those capabilities pretty quickly. It's the matter of second half, and then basically when you start the next year, the administration cost part will be settled, and you will no longer have that cost burdening. What is more difficult to understand is how you deal with the technology costs. Because if you are paying to WithSecure in any case, what kind of thinking will you have in ramping up those technology capabilities? What kind of capabilities are we talking about?
I mean, if you want to hire people, then of course you need to, at least in today's market environment, you have to be pretty early. You have to be sure that you get those guys. You have to hire them perhaps six months, even more, before you can basically get rid of the overlapping cost. There might be some, let's say, capacity costs that are fairly easy to fix, so you just switch and, the overlapping time will be just a matter of weeks. Could you clarify and discuss this cost base, what is actually going to shift? Because that would help us make better estimates, and then there wouldn't be kind of too much volatility in analyst expectations regarding this topic, which is. It has basically nothing to do with your business.
It's just how you kind of run the transition. That's why I think it would be worthwhile to share as much as you can in order to get the estimates right.
Let me start with the admin part.
You start.
You continue.
I'll continue.
Yeah.
Okay.
For the rest of this year, it is about EUR 9 million that the TSA cost is, and that's included in our guidance. In that sense, this year should be easy for you. Of that EUR 9 million, about EUR 5 million is more on the admin side, and EUR 4 million is the R&D. The R&D is maybe the more difficult one. For the admin part, there, as said, we are ramping up our capabilities. Most of those TSAs will end at year-end. There are some IT things that we are still doing during the first quarter. There are some, like, minor part of finance services that we continue during next year. Really the major share, and I.
Now I don't have a percentage for you, but, so that will really reduce significantly. Yeah. Then the R&D is-
On the technology side, we have a backdrop of 18 months to be fully ready, to be fully independent, have total control over the technologies that we need to control, not only maintain, but develop them further. Okay? That 18 months, let's see how we track on that. We can extend it by months or a quarter or whatever. At this point in time, everything is alluding to the fact that we will be fully finished by 18 months. We are already in heavy ramp-up phase of our own capabilities in the second half of this year. By far, the majority of the needed recruitments are going to be made already in the second half of 2022 to be ready at the end of 2023. It's precisely like you say, Matti.
You have to make those recruitments way in advance. I'm not saying that we wouldn't be completing the team also during 2023, but the brunt of the hiring happens this year. In terms of technology, skills transfer and the technology transfer and maintenance and further development, we've kicked off a project already in quarter two. It's in full swing. It's resourced now, and now it's up to us to recruit more people in the second half of the year to take on those responsibilities within the project. It's going as planned, and it started precisely when we planned it to be started, beginning of May.
All right. That's good. Is there any kind of capacity-related costs in the 8.2 annual technology cost that you're basically buying next year from WithSecure? I mean, kind of capacity costs that are easy to switch or quick to switch when the time comes.
There are some, and these are precisely like you say. We will continue to use same service providers and which we'll be quick to transfer over.
Right. What kind of relationship is the cost between the people that you have to hire early in advance and the kind of capacity cost, which is easy to-
That I don't unfortunately have the details on.
Okay. Because it's a big difference if we pencil in double EUR 8.2 million in next year's R&D cost compared to something clearly smaller.
Mm.
If we guess wrong, then it will kind of show very oddly in the numbers.
I don't unfortunately have the split for that.
As soon as you do, I think it would be worthwhile to share those because, like I said, it has basically nothing to do with your business.
Right
We should be spending our time in other things than just trying to guess.
Mm
What kind of duplicate costs you will have next year?
This is a relevant question, no doubt.
Okay. All right. Thank you.
Veikko Silvasti, Danske Bank. Just continuing on Matti's question. Just to simplify it a bit, this year we are trying to. You're aiming at around 40% adjusted EBITDA margin. Next year, we will have lesser double cost on admin, right? But we still have some costs of the R&D side. You probably are looking at a bit higher adjusted EBITDA margin next year. Then in the midterm, let's say until 2025, you'll be looking at adjusted EBITDA margin of around 42% or above.
Yes. That's good.
Okay.
Of course, we don't have the next year number yet, but I think your thinking pattern is right.
Clear. Thanks.
That's what your guidance says.
Yes.
Even a number for next year.
That was a good summary by Veikko Silvasti. Okay. Now if anybody online has any questions, now is a good time. We seem to have covered all the questions from the room over here, so let's give you a minute if anybody online wants to ask a question.
Yes, we have one question. Regarding your profitability guidance, in your thinking, what is the range for approximately 40% margin? Even a rough indication would be helpful. Thanks.
Yeah. Yeah, that's something where we need to define our ways of working. I would say that 39 is not about 40. Whether the limit goes 39.5 maybe is 40.
Normal rounding rules would apply.
I think that's at least a good starting point.
That's a good starting point. We don't have any more questions. Okay. Any more questions from the room? Appears like we've done all of those. Thank you very much everybody here who attended in person. Thank you very much joining us online for our first independent quarterly result and half year result session and hope to see you again, at the latest in October when we talk about quarter three. Have a great day.
Thank you.