Good morning, and welcome to this presentation of Pexip's first quarter results. My name is Trond Johannessen, and I'm the CEO. Together with me here at Lysaker today, I have Øystein Hem, our CFO, and Åsmund Fodstad, our Chief Revenue Officer. Together, we will take you through the highlights of the first quarter and what we are focusing on going forward. The standard disclaimers apply as usual. Before going into the details of Q1, let me give you an overview of what Pexip is about now that we have entered 2024. We were founded in 2011, and currently, we operate with around 300 employees in 25 countries across the globe. We are a niche video conferencing player, focusing on interoperability and secure and custom meetings. We do software only, either delivered as a software or as a service.
We have unique partnerships with the leading companies in our industry, and we generally complement their solutions instead of competing with them. Our customers are generally large organizations, both in the private and public sector, that have complex needs when it comes to collaboration. Our annual recurring revenue base has now reached $105 million. Now to the highlights of the first quarter. The Q1 results are, in our opinion, solid, with Q1 revenues of NOK 292 million , which is 12% up year-over-year, a total ARR of $104.8 million, which is $2 million up quarter-over-quarter, and an EBITDA of NOK 64 million , with a corresponding cash flow of NOK 105 million .
We have a strong development in Connected Spaces with a $1.1 million ARR growth in the quarter, benefiting from positive market trends, the HP Poly partnership, improved competitive dynamics, and product enhancements. We had some major wins in Secure and Custom Spaces with HP Poly recently, and this includes the U.S. Social Security Administration and a large defense organization. Our interop partnerships keep expanding. The first part of the Zoom solution is now launched, and we're starting a new partnership with Cisco, focusing on the federal market in the U.S. Our secure AI solutions for self-hosted video platforms is developing according to plan, with a targeted general availability in the second half of this year. On financial targets, we are confirming what we said in the Q4 presentation. Medium term, we target to consistently deliver above 10% ARR growth and minimum 20% EBITDA.
Specifically for 2024, we aim for 5%-10% ARR growth and 13%-18% EBITDA. Pexip's mission is to make seamless video communication available to all organizations, regardless of technology platforms and security requirements. We have two main solution areas: Connected Spaces and Secure and Custom Spaces. Let me first give you an update on Connected Spaces. Pexip's goal in interoperability is to make sure that all users of meeting rooms out there should not have to think about what type of equipment is in the meeting room that they walk into or which type of video meeting they are invited to. It should be 100% seamless. This is what we are aiming to realize for all users of meeting rooms out there. We call it any-to-any.
To do this, we need to work with all the players in the video conferencing industry to be able to provide robust solutions. You already know that we work closely with Microsoft and Google. Now, we have a couple of new partnerships in the making. We have been working with Zoom for a while to develop an improved interoperability experience from a Zoom Room connecting to a Teams meeting. Now, the solution is available for Zoom-registered devices as a first step. For all other Zoom Rooms, the solution will be available very soon. Commercially, this is a Pexip product that will be sold by Pexip and our partners to organizations that have Zoom Rooms as a part of their infrastructure. We are also starting a new partnership with Cisco to jointly provide Pexip interoperability solutions to the highest security levels within the U.S. federal market.
These are solutions that only Pexip provide in the market today, and they are very often used together with Cisco hardware. Thus, it makes a lot of sense for Pexip and Cisco to make sure that our solutions work well together and are presented to the customers in a coherent way. Last week, we attended Cisco's annual partner summit in the U.S. We presented the Pexip interoperability solution to Cisco's partners and sales force within the U.S. federal market. This was extremely well received by the partner community, and we are already working on several opportunities together. In Secure & Custom Spaces, we provide a full video meeting solution that can be self-hosted or placed in a private cloud. Also, in Secure & Custom, we have some updates to share. First of all, the concept of having more than one meeting platform is increasingly gaining momentum in the market.
Large organizations are looking to complement their primary cloud-based meeting platform with a self-hosted or private cloud-based platform. Pexip is delivering this extra platform, including the plug-in to Outlook that enables the users to book either a standard meeting or a secure meeting. We are constantly developing our secure meeting functionality, and it looks like we are the only provider in the market that actively invests in this area. For that reason, we also have good traction in the market, and you will hear more from Åsmund about that a bit later. AI functionality is typically an area that requires product development. For organizations that cannot use public cloud services, it becomes more complicated to take advantage of advanced AI functionality, as this is generally delivered through the cloud today.
To solve this challenge, Pexip partners with NVIDIA to enable secure use of AI in a self-hosted or private cloud environment. There are many AI features in video conferencing, and many of them have been around for a long time, like noise canceling and picture optimization. But the one we find most interesting is AI-powered translation services, either speech-to-text or speech-to-speech. This is something that has a huge cost-saving impact for organizations to do a lot of translation today, and we work with quite a few of those. To deliver this AI functionality, we work closely with NVIDIA and a couple of pilot customers. We are one of the early adopters of the NVIDIA Maxine platform, and we get access to the latest NVIDIA technology to the benefit of our customers.
The use case of translation is very interesting to NVIDIA, as the productivity gains from this functionality are so obvious. On the Pexip side, we have developed our own AI media server architecture. This makes it possible to run AI applications on self-hosted NVIDIA hardware that has NVIDIA models on them, like language models. This is significantly more complex than running AI applications through a cloud service where everything is packaged together, and this is probably the reason why Pexip is the only provider of this solution in the market today. Øystein will talk more about financial performance in a bit, but just a couple of comments from me. We now have four quarters, four consecutive quarters of growth and profitability improvements behind us. Our underlying ARR has grown 10% since Q1 last year and is at an all-time high.
Our 12-month rolling EBITDA is closing in on 15%, and our free cash flow the last 12 months was NOK 164 million. All in all, we are quite happy with the improvements made in our financial performance, but we are, of course, working hard to further improve. Now, let me hand it to Åsmund to give you a sales update.
Thank you, Trond. I'm happy to say that we had yet another very strong quarter for Connected Spaces in Q1. Let me emphasize a few important highlights. Number one, as businesses stabilize on hybrid way of working, the need for interoperability with a seamless user experience is gaining momentum and driving demand. The additional Fortune 500 wins this quarter confirm our position in this market. Users want to meet on any meeting platform from any room, and Pexip simply makes that happen. It's what we call any-to-any. Secondly, as a testament to our unique technology and market position, we have recently forged new partnerships with industry giants like Lenovo, Zoom, and now also Cisco Webex. All three have chosen Pexip for interoperability, further validating our position in the market. These tech giants, together with Microsoft, HP Poly, and Google, choose to partner with Pexip rather than competing.
That is a statement in itself. Let's have a look at Secure and Custom. These segments continue to be growth segments for Pexip, with a 15% growth overall and a 27% growth year-over-year in Secure. Pexip is also growing a stronger and stronger position in the defense sector. Our recent wins with the United States Social Security Administration and the world's largest defense organization proves that we have the best technology for these markets. Thirdly, our secure meeting solution is easily integrated into the daily workflow of users by simply being another meeting button in Outlook. Furthermore, large organizations are increasing their focus on authentication and user access to ensure that they have the right person in the right meeting at the right time. This is another area where Pexip presents the market with unique technology for such control.
Today's geopolitical situation demands more control and privacy of meetings and user access, and Pexip have unique solutions for this. Lastly, for Custom, our newly developed VPaaS, we are now moving into beta testing with several customers in Q2 and will be ready for an official launch in Q3 according to plan. We're excited to get this new platform into the market to meet the demand of our security-focused customers across regulated industries like healthcare, bank finance, government to citizens, where this platform will both differentiate, and I'm sure it will shine. With that, I will hand it over to Øystein for details on the financials.
Thanks a lot, Åsmund. Let me start off, as usual, with the development in annual recurring revenue. We grew the ARR base with $2 million in Q1, to $104.8 million. Our underlying ARR, so excluding legacy revenues, grew $2.6 million and is up, as Trond said, 10% year-on-year. Self-hosted software grew $0.7 million, while Pexip as a service grew $1.3 million. In terms of geographies, I'm happy to see all geos deliver growth, with the majority of the growth coming from the U.S., with $1.3 million. This is on trend from the previous quarters, with the U.S. outperforming the other geographies. Looking at the development in the two business areas, we see that Connected Spaces and legacy combined grew $0.6 million.
The dynamics is similar to the previous quarters, with growth coming from strong new sales, despite having net retention rates below 100%. Secure and custom, on the other hand, has lower new sales, but growth is higher due to a positive net retention ratio across existing customers. Overall, secure and custom grew with $1.4 million. We're starting to see our pipeline have a higher share of secure and custom, in line with our strategic focus. This is why we're targeting above 20% growth within this area on an annualized basis. Moving over to the P&L. Revenues continued to grow, and in Q1, they were $292 million. Sorry, NOK 292 million , up 12% from Q1 of last year.
The positive currency impact is somewhat less than in 2023, but it's still there, as revenue growth continues to be higher than our 7% ARR growth. With a stable cost base compared to Q1 of last year, the revenue growth translates into almost an equal profitability increase. For Q1, we grew revenues with NOK 31 million, and we grew adjusted EBITDA with NOK 30 million. For Q1, our adjusted EBITDA rate is 22%, and we're on track to reach our full-year guidance of between 13% and 18% for the year. On costs, operational improvements offset the impact of inflation, as well as the adverse currency impact across both the U.S. dollars, pounds, and euros, appreciating versus the Norwegian currency. This adds up, with more than 70% of Pexip's operation being outside of Norway.
Underlying salary costs are stable, despite salary adjustments, which are done at the start of the year, as well as the better target achievement in Q1 compared to Q1 of last year, impacting variable pay. Those increases are offset by a continued search for efficiencies, and we're leaving Q1 with about 10 fewer people than we entered the year with. That puts us in a position to continue to improve in 2024. Other operating expenses is substantially below Q1 of last year, in particular from lower consulting costs. Looking at cash flow, Q1 was a strong quarter, with a net increase in cash of NOK 105 million in the quarter. This is compared to NOK 47 million in Q1 of last year.
60 million in profit before tax, 80, if we exclude depreciation, is the main driver, as well as working capital improvements of NOK 20 million. It's also worth highlighting that both investment cash flow and lease expenses are down from Q1 of last year. To summarize the main points, revenues are up 12%, and with costs being in line with Q1 of last year, that gives us a substantial improvement in the EBITDA. We have close to NOK 7 million in restructuring costs this quarter, which we expect that will give us a somewhat improved cost run rate already from Q2. Net financials is also strong this quarter, as the NOK was weaker than the previous quarters, and this gives us a gain as we collect our U.S. dollar invoices on a higher value than what they were originally booked at.
With that, we're close to doubling our profit before tax compared to last year. With this, I give the word back to Trond, who will finish the presentation with our outlook and targets.
Thank you, Øystein. Pexip now has a clear and well-understood strategy in our ecosystem. We work in partnerships with the leading companies in the industry to complement their solutions and not compete with them. We continue to add new partners, and the list of partnerships is now very different from what it was early 2023, when we mainly worked with Microsoft and Google. It's not that many software companies of our size that are invited to work with all these technology giants, so it is something we're quite proud of, and it is a testament to our products and the quality of our technology. We believe there is tremendous potential, tremendous value in these partnerships going forward, as we are frequently being introduced to new opportunities as we work closely with our partners. It is a core part of our strategy to continue to strengthen and nurture partnerships going forward.
Outlook. We see a continued positive market outlook, both in Connected Spaces and in secure and custom spaces, and we are confident that our place in the ecosystem and the current and new partnerships will continue to drive growth. Looking into Q2, our best estimate is that we will end the second quarter with an ARR in the range of $105 million-$108 million. We reiterate our 2024 full-year outlook of 5%-10% ARR growth and 13%-18% EBITDA. And we also confirm our midterm target of constantly delivering above 10% ARR growth and above 20% EBITDA margin. Our second quarter results will be presented on August 15th, and now I think it's time for Q&A.
It is. Welcome, everyone. I'm happy to be joined with analysts from both Pareto, Arctic, and Carnegie. I think we'll start off with Pareto this time around. Jørgen, I believe you're on the call.
Yes. Hello, can you hear me?
We hear you louder.
Great. Thank you so much for the presentation. First of all, could I start with a question on the partnerships? Could you just expand a little bit on what these two new partnerships mean for you, and, and how you could sort of leverage these to try to expand on further opportunities and, and try to increase collaboration with these, huge companies, please? Thank you.
I think I could start, but feel free to chime in. Well, these partnerships are within the Connected Spaces area, so it's about interoperability, which is increasingly becoming a very important and strategic issue for the video conferencing industry. The expectations among the users of video conferencing out there are increasing, and the quality they require is increasing every day. So they need to be able to walk into a Zoom Room and have a Teams meeting, with a quality that is comparable to having a Teams meeting from your computer or from a Teams Room. And I think this realization among the players in the industry is what is basically driving the interest of working with Pexip to try to improve the quality of their services.
So I think we will see, you know, even more activity in this area going forward and the constant product development. And as this is really a niche in the video conferencing industry, I think it's rational for these large companies to partner with Pexip instead of using their own R&D resources to develop these solutions themselves.
I think it's also fair to add that, I think with both of those companies, there are other opportunities as well that we would love to engage with them on. I think by proving ourself as a both trustworthy and competent partner on what we're now starting out with, I'm sure there might be other opportunities that might come along. But the future will show.
And I think also with the two different parts it's somewhat of a different partnership because it's with Zoom, is what we in the earlier at least have been referring to as next generation interoperability, while what we're doing with Cisco is traditional interop, where they basically don't have a solution today. So both of them are living hand-in-hand, and it's also explaining that the Connected Spaces are absolutely a good market to be in going forward.
Great. And then also, if I could ask about the profitability, 'cause the EBITDA adjusted margin is now slightly above the target for the year. Why not upgrade the guidance? Are you expecting anything?
So I think as, as we saw from, last year as well, typically, Q1 and Q4 are, our strongest revenue quarters, due to the, seasonal fluctuations on, self-hosted software. And then we expect Q2 and Q3 to be, have somewhat lower revenues, and with a stable cost base, then the somewhat lower, EBITDA. So that's. It's more a reflection of the expected seasonality than, than anything else. But we're starting out the year, well, in terms of what we expected going into it.
Okay. That's all for me. Thank you.
Thanks a lot. Then I think we'll give the word to Arctic and Kristian.
Thank you. So, I have a question on, on the churn in Connected Spaces seem to have come down versus the previous two quarters. Was there any particular reasons for this, in Q1 and something you expect going forward as well?
I don't think it's a dramatic shift in that regard, but we have seen it quarter-over-quarter somewhat improving, at least if we look at both the combination of downsell and churn. And I think what that reflects is that the market has, to some extent, stabilized a bit as well. Looking back one to two years, you had Cisco coming into the market, so really making a splash and taking a, I would say, a very strong position in the CVI market, which is now a bit more stable. That together with BlueJeans being out, Poly cooperating with Pexip, the dynamics are sort of calming down a bit. We're starting to see that on churn.
Okay, thanks. And could you bring to light any particular headwinds you currently see in the market, and when you expect these to ease to support your medium-term outlook of above 10% growth?
I don't think we see any particular headwinds. I think we more see a kind of a continued, the market maturing as we move forward for our solutions within the secure and custom. Pipeline is stronger within secure and custom now, than it was before. We're seeing the sort of stabilization of the market within the Connected Spaces, so I don't think we're seeing any particular headwinds. It's more like a constant development of both our market segments.
I think it's also fair to point out that if you look at certainly the, our partnership with the, with HP Poly, we're just now starting to see the first deals that we started out with working in May of last year.
Anniversary.
Starting to mature now and have now closed. I think that's also the time it takes, unfortunately, in that segment, to go from introduction to actually being chosen as a supplier. And that we have both ambitions and hopes for continuing to then start to build in terms of momentum.
I think just we haven't sold any of the Zoom Connected Spaces products yet, so that's kind of something that will. We're bringing new things to the market. We haven't closed the first deal with Cisco on the federal market in the U.S. yet. So there are things that we are starting now that will give results on the growth side going forward. With similar,
That makes sense.
Just like you said on HP Poly, right? It takes time, but, but again, it's easy to be optimistic about it.
Okay, thanks. You also continue to reduce the staffing a bit, despite the growing. Could you elaborate a bit on this development? If you could perhaps share some thoughts on how much the current staff is rated for in terms of revenue, and when you will start with net hirings again?
I think we have said a few times that the current number of employees should be sufficient to significantly, to also operate, you know, significantly higher revenue base than we have today. So we are constantly adjusting the organization, like every company does and or should do. And finding the exact right number of employees, yeah, that's, it's kind of a part of our daily job. So don't expect numbers to dramatically go down or up, and do expect us to be able to have a significantly higher revenues than today without significantly increasing the costs.
Okay, thanks. Then last question, a bit on the same, what Jørgen highlighted. But on the 2024 guidance, might be some wrong assumptions on the revenue and gross margin side, but I think the current OpEx of NOK 200 million, your guidance seemed to imply some uptick from that level for the remainder of the year, despite headcount now 4% lower than going into this quarter.
I think just on the outlook side, we have decided to not change our outlook for the year after just one quarter. So we will reassess the outlook as we go forward, but not after just one quarter.
Okay.
To add some flavor to that, I think our cost base as well as the cost of goods sold is pretty stable, and I don't have any big uncertainties around the development there. The revenue side is, of course, both dependent on continued sales success, but also in terms of what we deliver. If it's as a service or if it's software, has a pretty meaningful impact to the revenues in this year, and then the resulting EBITDA. So that's, I would say, the majority of the uncertainty should be on that side.
Sure, sure. Okay, thanks a lot.
Thanks a lot, Kristian. Then I give the word to Carnegie and Oliver.
Yes, thank you for taking the question. Yeah, I was also looking at the, at the OpEx side a bit, and it seems like your OpEx per FTE is increasing in this quarter. FTE is falling, but OpEx is a bit higher than I had expected, at least. So is this OpEx run rate, is this sort of representable for the coming quarters as well? Or is there any particular dynamic that we should be aware of here in this quarter?
Not to a great extent. So we've, we have had some event cost on, on other OpEx that has taken OpEx a bit up. But overall, I would sort of expect the same sort of run rate go in the, in the quarters ahead. Then you are correct in that cost per employee has gone up somewhat. Part is inflation, part is also currency, as the vast majority of our costs are outside of Norway and then being hit by a relatively weak NOK in Q1.
Yeah. Fair enough, fair enough. On the net working capital side, I mean, very strong cash flow in this quarter as well. Is there any timing or sort of phasing element to that development that we should sort of model a reversal, going forward?
In Q1, we did invoice a fair amount of multi-year contracts that we then collected. So the main increase on, or the main benefit on working capital is, on deferred revenue. While as trade receivables is actually higher going out of Q1 than it was coming in, which means that at least, on our side, we expect to continue to have a good cash inflow in the quarter to come. On cash outflow, we don't really have a lot of seasonality from quarter to quarter.
I think a big difference from this quarter compared to last Q1 is that, last Q1, we still had a relatively high level of costs related to the restructuring that we did in Q4 of 2022, in terms of when the cash effect of that actually hit. That effect is obviously not with us this quarter. We're seeing that on the improved cash flow.
All right, very clear. And then perhaps the last one on the sort of long-term outlook. I think previously, you've been only moderately positive on the interop opportunity, and sort of calling that a, call it a transitory opportunity. But now you seem more structurally optimistic on this, and you seem to focus a lot more on it. Is that due to some changes in the market, or is it due to sort of necessity for a strategic switch for the company?
I would say it's part of actually recognizing that we have now a position within mainly Microsoft Teams Rooms and Zoom Rooms, that we did not have before. As you highlight, we do expect that the number of SIP endpoints will slowly decline in the years ahead, in line with sort of the focus of the endpoint manufacturers. But we just heard Microsoft announce that they have passed 1 million, Zoom, sorry, 1 million Microsoft Teams Rooms in service with their customers. And with us launching that product, we expect to be able to have an offering that's relevant to those those customers, and that's represents a major opportunity for us now that we really didn't have if you look a year back.
And I'd like to add that it's a combination of what you just said. We have a much stronger position in the market versus competition. We also do see that the customer are much more conscious on keeping the estate they have. They basically have a multi-platform strategy, so they don't necessarily swap out all their rooms, and so on. So they keep on having multi-platforms, different technologies. And then, of course, that competition, and so forth, kind of disappears in those three combination and makes Pexip just have a stronger proposition. And also, our technology is enhanced a lot, and so the user experience is also much better than just a year back, which again resonates a lot in the market these days.
Very clear. Thank you.
Thank you, all. I think we'll close the Q&A portion of that. Thanks to all of the analysts for joining us, and thanks to all of you for listening, and we'll see you next quarter.
Thank you.
Thank you.