Good morning, and welcome to this Presentation of Pexip's Second Quarter Results. My name is Trond Johannessen, and I'm the CEO. Together with me here in our studio at Lysaker, I have Åsmund Fodstad, our Chief Revenue Officer, and Øystein Hem, our CFO. Together, we will take you through the highlights of the second quarter and what we are focusing on going forward. Standard disclaimers apply as usual. Before going into the details of Q2 and specifically for new viewers, let me give you an overview of what Pexip is all about. We were founded in 2011, and currently we operate with just below 300 employees that are located 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, delivered as a software or as a service.
We have unique partnerships with the leading companies in our industry, and we generally do not compete with them, but we work with them to complement their services. Our customers are generally large organizations that have complex needs when it comes to collaboration, and they're both in the private sector and the public sector. Our annual recurring revenue base has now reached $107 million. Now to the highlights of the second quarter. Our ARR base increased with $2.3 million during the quarter and is now at $107 million. Revenues amounted to NOK 266 million , which is 14% up year-over-year. EBITDA ended at NOK 36 million , which is an increase of NOK 27 million compared to the second quarter last year.
Cash flow was NOK 68 million in the second quarter, which leaves us with a cash position of NOK 587 million leaving the quarter, and this is after we have paid NOK 112 million in dividends during the quarter. Both Connected Spaces and Secure and Custom Spaces contributed to our ARR growth in the quarter, and we saw some major wins both in the private and public sectors. We continue to work closely with Microsoft, and this quarter, Microsoft announced the new functionality that embeds Pexip on the Microsoft Teams Rooms and enables interoperability from an MTR. With this, Pexip has a relevant offering to the more than 1 million Teams Rooms out there.
As you know, we also work with Zoom, and the new solution that enables Zoom Rooms to join Teams meetings with excellent quality is now available, and we have signed our first customers already. On financial targets, we are lifting our 2024 growth outlook to 8%-10% ARR growth and our 2024 EBITDA margin outlook to 16%-20%. Our medium-term financial targets remain unchanged for now. 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 say a few words about recent developments in both these areas. First, Connected Spaces.
At Pexip, our goal is to make sure that when people use meeting rooms, they don't have to think about what kind of equipment is in the room or what type of meeting they are joining. We want everything to work just seamlessly, no matter what. We call it any-to-any. To make this happen, we partner with all the big names in the video conferencing world to create solid, reliable solutions. In Q2, we worked closely with Microsoft to introduce a new interop solution for Microsoft Teams Rooms, MTRs, and we worked with Zoom to launch a new solution that lets Zoom Rooms join Teams meetings with great quality. Let me share a few more details about the new Microsoft solution that was officially launched at InfoComm in Las Vegas in June.
Microsoft has received feedback from their customers that the current built-in interop solution, known as Direct Guest Join, often doesn't meet their needs. In response, Microsoft teamed up with Pexip to deliver a more robust, embedded interop solution for Microsoft Teams Rooms. This solution will be available very soon, as Microsoft is currently finalizing the remaining development on their side. We see this as a massive opportunity for Pexip. With over 1 million Microsoft Teams Rooms installed in the market, and that number is growing, there is a significant potential for Pexip to expand our reach with this product, and the first orders are already received. In the secure meetings area, we continue to see that the concept of having more than one meeting platform is increasingly gaining momentum in the market. The notion that public clouds are great, but maybe not for everything, is spreading quickly.
Large organizations are looking to complement their primary cloud-based meeting platform with a self-hosted or private cloud-based platform. New regulations like NIS2 are also helping to drive attention around the need for redundancy in IT infrastructure and services. Pexip provides a secure meeting alternative that also works as a backup solution if the primary solution is down. We are constantly developing our secure meeting products, including how we go to market with our solutions. Sovereign deployments are emerging many places, also in the Nordics. As a concrete response to the increasing need for sovereign alternatives to public cloud services, Pexip, together with Orange Business Services and Kinly, are in the process of launching sovereign meetings as a service in the Nordics. This means that customers will have the opportunity to run video meetings on a trusted and compliant Nordic service, while keeping all data within the defined geographical area.
This service will be easy to consume and without the investment in hardware and infrastructure that is required for a fully self-hosted solution. Launch is planned later this fall. The product that Pexip delivers in this area is a modern, user-friendly video conferencing solution that is tailored for secure meetings. This includes meeting classification labeling, as you can see on the slide here, user authentication features, and various other tools that the users and admin can take advantage of. Øystein will talk more about financial performance in a bit, but just a couple of comments from me. The positive development on growth and profitability improvements has continued also in the second quarter. Our ARR has grown 8.5% since the end of Q2 last year and is at an all-time high. The underlying ARR has grown 12%.
Our 12-month rolling EBITDA has reached NOK 170 million, which corresponds to a 16% EBITDA margin. Finally, our free cash flow the last 12 months was NOK 190 million. We take this performance as evidence that we are operating in attractive markets with relevant products and a strong market position. Let me hand it over to Åsmund to give you some more flavor on the commercial side of the business.
Thank you, Trond. Absolutely seeing relevant products in a growing market. Happy to announce that we have had yet another strong quarter in Connected Spaces with 10% year-over-year growth. Pexip is gaining market share in this space, and the growth is driven by product differentiation and increased momentum from our strategic partnerships, especially the one with HP Poly. Let me emphasize a few important highlights. By winning additional Fortune 500 logos this quarter, Pexip confirms the leadership position. Users simply want to meet on any meeting platform in any room. Pexip products have an unmatched user experience with universal interoperability and is recognized as the trusted solution. Governments and large enterprise organizations must enable seamless operations across technology platforms to enable hybrid work, and Pexip delivers.
In June, we launched the new products that address critical needs in the growing Teams Rooms and Zoom Rooms markets. Customers are already embracing new technology that helps them scale their Zoom and Teams journeys. This validates Pexip's unique technology and market position. The fact that these tech giants like Microsoft, HP Poly, Zoom, and Google choose to partner with Pexip rather than competing to increase their own market footprint, is a testament to our technology and our market position. Needless to say, with our unique position, we are optimistic for further growth in this space and market going forward. Now, let's have a look at the Secure and Custom. Secure and Custom are growth segments for Pexip, and we're happy to see that they are growing according to expectation. A few highlights.
Number one, our continued investment in these markets are paying off with a 15% growth year-over-year. Secondly, Pexip is growing a stronger position in these markets, and we see it especially in defense and public sector. Our recent wins with the world's largest defense organization, intelligence services in the United States, and other government intelligence agencies across the world, proves that a secure and dedicated communication platform is in high demand. Like Trond demonstrated, Pexip secure technology easily integrates into your daily workflow by simply being another meeting button in Outlook. With your definition of access control, branding, and automated features, that makes the meeting both private and compliant.
These simplified workflows for users, as well as sovereign meeting solutions as a service, like the one we now see from Orange, will make it even easier for both large enterprises and public sector customers to choose secure meeting platform as their main or complementary meeting solution. The geopolitical situation and increasing regulatory compliance demand meeting privacy, user access, and data control. This is not going to stop, and Pexip see further growth in this segment as well. And with that, I will actually have hand it over to Øystein for the financial details.
Thanks a lot, Åsmund. Let me, as I usually do, start off with the development in ARR. As Trond mentioned in the highlights, we grew the ARR base with $2.3 million in Q2 to $107.1 million. This is an 8.5% growth year-on-year, and I'm also happy to see the growth in underlying ARR now reach 12%. With legacy areas now being minimal, this trend supports our ambition to have growth of 10%+ per year from 2025 and onwards. As legacy areas are now just above $2 million, we plan to include this in Connected Spaces in terms of reporting from 2025. Europe had a strong quarter, together with the U.S., this in Q2, so both of our largest geographies are contributing to our growth.
In terms of technologies, we continue to see somewhat stronger growth in Software as a Service, which is now 50% of our annual recurring revenues. Looking closer at the development in the two business areas, we see that Connected Spaces and legacy combined grew $0.4 million. The dynamics is similar to previous quarters, with growth coming from strong new sales, despite having a net retention rate below 100%. Secure and Custom also had strong new sales this quarter, taking net growth to $1.9 million, with several large accounts being brought on. We also had good upsells on a number of accounts, but a lower net upsell due to a loss of a large telehealth customer.
Churn in Secure and Custom continues to be very low, giving a growth of 5.3% in the quarter, which is on our ambition to have 20% growth year-on-year within Secure and Custom. Moving over to the P&L. Revenues continued to grow, and in Q2, they were NOK 266 million , up 14% from Q2 last year, driven by growth in ARR, as well as some realized currency benefits. We continued to convert most of the revenue growth into profits, and with a stable cost base compared to Q2 of last year, this is in despite of inflation, 33 million in increased revenues flows through the P&L to 27 million in increased profitability, which is a margin improvement of 10 percentage points compared to Q2 of last year.
On cost, operational improvements offset the impact of inflation, as well as the adverse currency impacts from a weaker Norwegian currency, leading to a stable cost base compared to Q2 of last year. We have a slightly lower headcount than last year, leading to a reduction in fixed salary. However, this impact in Q2 was balanced out by higher variable salary from higher target achievement. Other operating expenses are fairly stable, with the improvement compared to last year mainly being in external consultant costs, in line with Q1 of this year. Looking at cash flow, Q2 saw a solid operating cash flow of NOK 79 million. This is a result of a stronger EBITDA, as well as seasonal working capital improvements. Together with lower investment and leasing cash flows, this resulted in a free cash flow of NOK 68 million.
Our cash position is still somewhat down from the end of Q1, due to the dividend paid out in Q2, but it is still NOK 79 million above the cash position if we compared with Q2 of last year. To summarize the main points, revenues are up 14%, and with cost being in line with Q2 of last year, this gives a substantial improvement in EBITDA. Depreciation is stable and in line with Q1, and a neutral net financial gives an EBIT result of NOK 13 million . With that, I give the word back to Trond, who will finish the presentation with our outlook and targets.
Thank you, Øystein. We continue to see a positive market outlook in both connected spaces and secure and custom spaces. With attractive markets, a solid market position, and very relevant product offerings, combined with the partnerships we already have and the new ones we have signed up, we are quite confident that this will continue to drive growth. Looking into Q3, our best estimate is that we will end the third quarter with an ARR base in the range of $108 million-$110 million, and that is compared to the 107 we had leaving the second quarter. We also increase our 2024 full year outlook for ARR growth to 8%-10%.
Previously, we had 5%-10%, and we increase our EBITDA margin outlook to a range from 16%-20%, where the previous range was 13%-18%. On the midterm targets of constantly delivering an ARR growth above 10% and above 20% EBITDA margin, we keep them unchanged for now. Finally, before we go to Q&A, November seventh will be the date that we present our third quarter results. Yep, I guess I'm inviting my friends back to the studio to see if there is potentially some guests.
Yes, we are. Yeah. Thanks, Trond. So we'll start off with the Q&A. We'll start off with Jørgen Weidemann from Pareto. Jørgen, are you with us?
Yes. Hello, guys. Can you hear me?
We can hear you.
Great. Thank you so much for the presentation, and congratulations on a strong quarter. So I do have a few questions. Maybe first, could you elaborate a little on the momentum you see in secure spaces, and what do you see in terms of market interest? And what are the, you know, the larger clients within secure spaces, what are they focused on? What are they using as criteria for choosing your or other people's services?
I can start, and then you can-
Please
... you can fill in. But in general, there used to be a movement that everything was going to the cloud. Cloud-only was the strategy for many large organizations, both in the public and private sector. And then that pendulum has sort of come back a little bit to organizations having a bit more, call it diverse, view on their IT infrastructure. The cloud is great, but not for everything. So seeing that, certain data, certain services, organizations are not comfortable having 100% of that in the cloud. So there is a need for something that is either on a sovereign level, you know, within the national boundaries, I need to know where my data is, or actually on the server in the basement.
This trend has basically, as many of these security trends, started in the defense area. We see defense, you know, organizations and the defense of many countries moving in this direction.
Yep.
We see that government organizations, government entities focused really that handle sensitive data, that handle national interests to a large extent, is sort of moving in this direction, and then the other organizations are following. You know, defense contractors that work closely with the government, and other organizations that are involved in this ecosystem are moving in the same direction. And then there is regulation, like NIS2, which is demanding a certain redundancy for some organizations on the IT side that requires them to have something in addition to a cloud service. That could be an on-prem or sovereign, sovereign service. So, I guess the answer is it's a trend. It starts out with defense, it moves into government, it moves into the private sector, and we see that there is, the momentum is increasing.
Yeah, and just to piggyback on that, the, with the large, especially the large enterprises, they, they have compliance, you know, regulations and so on, just like any defense organization, has or anyone that has to do with defense. But we also do see that now with artificial intelligence, the NIS2 and so forth, that even maybe an HR meeting should not be in a public cloud, et cetera, et cetera. So this is becoming more and more relevant also for, for, for public sector. But sorry, for, for enterprise sector.
Great. And if I could ask some of the same question for Video Innovation, which is not growing in the same way, do you see any changes in the trends and then the demands from customers there?
You wanna go?
Yeah. I think what we're seeing in Video Innovation is that a fair number of customers that have chosen a platform, they are sort of new customers are usually starting a bit smaller, and then they're growing as they expand the platform that they're on. I think the needs are the same in terms of-
Yes
... data control. What we are seeing is that with the massive deployments, that those really large, especially telehealth deployments are, but also in the government space, there is a need for customers to have some of the operation of that platform managed by a vendor. And so that's one of the reasons why we have talked about our beta platform right now, a video platform as a service, where we take on a fair amount of that operations from the customer, but leave them in control of all of their data and have that geofence then the, and not give out any of that data to us. So I think within Video Innovation, we see that the complexity of operating it as these platforms grow in scale is an increasing need that we also need to have a good answer to.
Mm-hmm. And then reminding everyone that those are long sales cycles, so even though this quarter was not the strongest one, we still see great momentum in this market.
Okay, great. Thanks. And then a final question, if I may. When you increase guidance now for 2024, you increase both ARR and EBITDA adjusted margin. Should we, or have you changed your assumptions when it comes to the cost base, or is the EBITDA adjusted margin mostly a reflection of the higher growth?
I think, it's mostly a reflection of the higher growth that we see. And part of the guidance increase is also narrowing the band somewhat as we're now two quarters into the full year. But on EBITDA in particular, we see somewhat higher revenue growth than both our ARR targets and our internal assumptions. And so we see perhaps some of the currency impact hitting us on the or having a positive impact on the revenue side, while we've mitigated most of that impact on the cost side, by sort of lowering the underlying cost base.
Great. Thank you so much.
Thanks a lot, Jørgen. I think we'll give the word to Oliver Pisani from Carnegie. Oliver, are you with us?
Yes, I am. Good morning, and congratulations with a good report. So, I don't have that many questions, but the first one was the cash flow was very strong in this quarter, driven by net working capital. Is that to be considered sort of a structural improvement or the result of structural improvements to the working capital profile? Or is it something that is more related to timing and seasonality, and that may reverse in the second half?
I think the answer is, a bit of both. So I think what you will see is that with stronger growth in, software as a service, in particular, we see, more deferred, revenues or contract liabilities. That will have a structural improvement on working capital. Then there's also a positive impact this quarter from, lower trade receivables. That's more seasonal. So, for Pexip, we invoice quite a lot in Q4 and Q1, which gives good, cash flow quarters in Q1 and Q2, and that's more of a seasonal impact. So I do expect lower, sort of net cash flow in, Q3 and Q4, which is in line with the same seasonality we saw in 2023.
Very clear. Thanks. And then I think you mentioned the loss of a large telehealth customer in this quarter. Was that a new event or ... and how much of an impact did that have in that case?
So it's a partial loss. They're continuing with Pexip on their video infrastructure. So it's still more than $500,000 to Pexip on an ARR base. But then the impact on the telehealth side is that they are now moving forward with a different provider. That had a net impact of close to $1 million to Pexip. So obviously, it hits the net retention rate quite significantly once you have a sort of single event like that.
Yeah. Makes sense. And, with respect to the partnerships with Zoom and Microsoft, can you say something about the sort of initial customer response to the interop offerings that you've launched there?
You wanna go first?
Yeah, I can try. Yeah, very positive, I guess is the headline. This is something that has been driven by customer feedback coming into both Microsoft and Zoom, so from some pretty large organizations. So those organizations will be pretty quick in implementing these new solutions as they are available in the market, and the Zoom solution is now available. The Microsoft solution will be available very soon. And of course, talking about pipeline is always a bit difficult, but we see quite significant sales pipeline for both the Zoom product and the Microsoft product today. So our salespeople are quite busy talking to customers about it, so we are quite optimistic.
I think another very important part of this is that it keeps Pexip's relevance also to those customers that are moving to Microsoft Teams Rooms or Zoom Rooms. So in the past, you would have customers who, even though they were very satisfied with the Pexip product and the, and support that we give, we weren't relevant to them if they moved from SIP endpoints over to Microsoft Teams Rooms. Now, we have a product which is relevant also for those customers, which I think will see a positive impact of, in terms of, of churn for those customers that are in that movement.
I think it's also a very good explanation or example on how, let's call it the traditional SIP interop kind of a story, 5, 10 years back in time, and how interop now have developed, even with new players, large players. The Pexip is still very, very relevant in this space. It's clear that it's gonna be a multi-platform game out there.
Exactly.
It's not going to be Teams for all, or Zoom for all, or Google for all or Cisco for all. It's going to be a mix out there, and that makes the need for interoperability higher than ever.
Very clear. Thanks for taking my questions.
Thanks a lot, Oliver. Lastly, I think we have Øystein Lodgaard from ABG on the call as well. Hi, Øystein.
Hi, good morning, and congrats on a good quarter. I have many questions, but I'll try to keep it a bit short. Can you... Of course, you commented on the Poly partnership being a positive contributor to Connected Spaces in this quarter, but can you say what the development is? Are you seeing the pipeline kind of increasing there, and what should we think for, yeah, next six and twelve months?
Well, number one, the HP Poly partnership is actually just as well contributing on the secure side. It's very often on-premises installations with their Clariti solutions. So it contributes on both, just commented on that. We have the first year now under the belt with HP Poly and with good traction. I don't think we're gonna comment on the exact numbers, but we just came out of a good Q4 with that partner. And we do see the increase in both the pipeline and also the momentum for the next 12-18 months. So that's, that kind of keeps us optimistic about the partnership. It is, of course, also replacing a large player in this space to begin with, so therefore, as well, it's a good installed base to tap into.
Mm. It's with going into sunset in mid-2026, I guess. Now we really should start to see customers beginning to think about replacing. Do you see... Do you still think that the potential is as large, or have you seen customers switch to other providers? Or do you still think you'll take a fair share of being able to migrate the fair share of the Poly customers to the new solution?
W ithout speaking of specific numbers, yes, we'll keep on taking a fair share of it. And yes, some of them are, of course, moving to different solutions, so we won't get 100% out of it, but again, we see the next 12-18 months as a good period with this partnership.
Thank you. And in terms of costs, do you think you should be able to keep the level you are now? Or do you see that wage inflation, et cetera, should drive higher costs into 2025? Just think, how should we think about cost increase from 2024 to 2025?
I think what we're seeing is we are seeing impact from wage inflation. I think we see that on a sort of per unit level, as any other company. Then I think for Pexip, it's we'll continue to do operational improvements and to reduce cost in certain areas. Then perhaps more over the next twelve months than the previous twelve months, we'll also see that we're doing some investments and adding some cost behind teams that are doing really well. And so I do expect them still a fairly flat cost base, but perhaps some increase compared to the last twelve months.
Mm, that's v ery clear. Thank you. Very clear. Thank you. And-
As you see on the, just to comment, as you see, you see it from the numbers, the business is scaling quite well, and we have said many times that we believe that the current cost base is able to sort of absorb quite a lot of growth. And then there is a question of how much growth will we see, and how is that going to impact our sort of desire to invest into the areas that are most attractive? So I guess it's, you know, the answer is relatively flat, but, but we are opportunistically assessing areas that we believe we should invest in.
Hmm. Video Innovation, which you still split out as a part of secure and spaces, shows a negative development now in Q2. What is your view on the outlook for that part of the business? Do you see that starting to pick up, or do you have a view on the market outlook there?
I think we're seeing, as I mentioned earlier on the question from Oliver, the decline this quarter is due to a single customer, so it's a bit of a one-off event. We do see quite a lot of traction from an end customer discussion point of view. I think it's still a very relevant product and a relevant business area that we expect to grow. But then I think most of the momentum that we see on Secure and Custom with regards to higher needs for security, higher needs for compliance, benefits the Secure Meetings side of the business more than the Video Innovation side.
Hmm. Hmm. I see. And a last question from me on, you have a pretty nice cash position. Should we expect that to be paid out, or, or do you see any other use for that cash, M&A or other types of investments you would like to do?
I mean, we have a dividend policy in place that was communicated last year. We haven't changed that one. So I guess that's the answer for now. There are no immediate sort of plans to pay out the whole cash reserve, but sticking with the dividend policy, I guess that's the plan. And if there is M&A opportunities coming up, there are certain opportunities in the market, we will of course assess them as they come along. But it's difficult to answer that more precisely here.
I see. Thank you very much for taking my questions.
Thanks a lot, Øystein. I also have a few questions come in by email. And from Kristian Spetalen, who needed to field another call, I have the following question. So, the growth implied in the Q3 ARR guidance seems slightly soft, given the past three quarters, as well as additional drivers in Q3 from the MTR, Zoom and Cisco partnerships. Can you please shed some more light on this? If I'm to take that one, I would say that our guidance for the next quarter of $108-$110 implies a pretty consistent growth with what we've done in Q1 and Q2. So about the $2 million and sort of the mid-range of that, that guidance.
And then I think we're hopeful for the impact from both the MTR product, the Zoom product, as well as the Cisco partnership. But I don't want to. We haven't incorporated that in the guidance until we actually see some. We want to see that impact before we sort of count on it. I think that's the honest answer to that. So that's pretty much in line with what we see, knowing also that realizing the sales impact of new launches does take a bit of time. So it's not like it will have a dramatic impact the month after. But it's definitely three things that we see will support our growth going forward.
But we don't necessarily agree that it's a soft guidance. That was his words.
Second question: Do you consider legacy churn as finalized at $2 million? I do expect the development in the legacy area to continue on a sort of relative basis, so a percentage-wise decline will continue, as we're not reinvesting in that area, and we're not doing a lot of sales activities to to support it, as that time is better spent on other areas. But of course, the net impact will be quite significantly smaller as a result of legacy areas now being being $2 million. So even if that was to half over the next 12 months, that still will have a a net impact of around $1 million.
We will, at some point, include legacy areas in the other business areas, so we will stop reporting on legacy areas. But we haven't really decided exactly when, or have we?
From 2025.
Next year, yeah. Mm-hmm.
Final question from Christian: You added some headcount quarter on quarter for the first time since Q1 of 2022. How should we expect overall headcount to develop over the next 12 months? I think there are some timing reasons for sort of headcounts growing quarter on quarter this quarter. So it's not impossible that that trend is sort of back to how it was already at the end of Q3. I do think that the majority of, as we've said before, the headcount reductions are behind us. While we'll continue to drive for continued operational improvement, we also see areas where we think that by adding another person, we can increase our growth.
Yeah. So don't expect any dramatic changes to the headcount going forward, quite stable.
We do a final check if there are any, any last questions coming in. I don't see any. And, with that, we thank both the analysts for, for their questions, and, to all of you for, for listening in. Thanks a lot for-
Thank you very much.
... for the call.
Thank you.