Hello everyone, and welcome to Pexip's Q1 ARR update. My name is Øystein Dahl Hem, and I'm the Interim CEO and CFO of Pexip. The presentation will last for approximately 15 minutes, followed by a Q&A session with some of the analysts following Pexip. With that, let's get into it. For new viewers, Pexip is a video conferencing software company targeting the large enterprise and government sector. We offer software on a subscription basis. Today, we are proud to serve 15% of the Fortune 500 and prominent public sector organizations across the world. We're able to do this because we have unique video technology and our ability for customers to customize our platform to fit their unique needs. This unique technology has given us the ability to partner with the giants in our industry like Microsoft and Google, as well as the top AV and IT system integrators.
We focus on three areas where we are unique and where our technology really shines. The first is video infrastructure, where we support more video endpoints and more video platforms than anyone else in the industry. We do it in critical meetings, where the most security-conscious organizations in the world are choosing Pexip for their critical meetings, and we do it on Video Enablement , enabling the leading telehealth, services, retailers, banks, and governments to run their customer and citizen interaction on Pexip. During the last two years, the use of video has been transformed, and it's gone from a tool that almost no one used to now something that almost everyone is used to using. These trends are fueling the massive market growth in collaboration and in video communication. It's important for me to point out that Pexip does not aim to address the whole collaboration market.
However, the markets we do address are in themselves huge and estimated at a $5 billion total addressable market within 2024. Within this core, video technology is a crucial component, and here Pexip has the leading technology. We have worked in this market for 10 years, and we have shown that we can consistently grow. During those years, the market has transformed multiple times. First, with the first PC-based video clients to Skype for Business from Microsoft to Teams and Zoom, and now with the mass adoption of video. Pexip's unique technology platform has allowed us to adjust with the changing customer needs and continue to grow. Now on to the focus of this presentation, which is the ARR development up to Q1 of this year.
In terms of Q1 standalone, this is an overall flat quarter with an underlying growth of $1.2 million and a recognized growth of -$0.8 million due to a changing pricing model with a partner leading to a $2 million negative one-off. We are disappointed about the growth in Q1, which comes down to the development in new sales and in particular in terms of net upsell to existing customers. This is down to three core reasons. One is the lack of hardware endpoint deliveries to our customers, which is delaying projects and removing triggers for new video infrastructure projects. The second is a lower net upsell to existing customers due to the growth in capacity over the past two years and the delay in return to office, meaning lower use of video systems than customers anticipated.
The third is that we see that our refocusing of the strategy, while having a lot of customer attention and creating a lot of opportunities, is still at an early stage of both execution and pipeline development. A positive that we take with us from this quarter is that we continue to see a positive development on churn as we continue to grow in segments that have a structurally lower churn than our base. Going into each business area, Video Infrastructure is most impacted, both by the delays in hardware endpoints and by the $2 million one-off. Still, we continue to win key accounts in this segment. Within Critical Video Meetings, the relevance of this offering has exploded due to the increased geopolitical tension and the increased risk of cybercrime. We continued to win flagship customers, especially in the government space.
This quarter, we added two important ministries in major European countries, as well as several other government accounts. I also want to highlight a win with a regional Swedish government entity, a country which is leading in Europe in terms of GDPR and data privacy awareness. This fits our capabilities perfectly. In terms of Video Enablement , we see that we are still early in the pipeline generation for many of these opportunities, but we continue to grow. In Q1, the growth was driven by upsells to existing customers and large opportunities that moved another customer into the still exclusive $2 million + club with Pexip. Looking at geographies and products, the development in Q1 is pretty consistent across the various regions and across the two product areas.
Going forward, we do expect a slight shift in the mix more towards software as critical meetings and Video Enablement is mainly delivered as self-hosted software. In terms of the size of customers, it continues to be the large organizations that are driving our growth. This is the biggest segment for Pexip, both in absolute dollars and in year-on-year growth. The neutral development in smaller accounts is driven by our legacy business of cloud-based video meeting rooms, which continues to decline, which is the driver for the neutral growth in this segment. This page shows the split of growth between new customers and existing ones. Overall, growth from new customers is at $23 million, which is in line with the previous twelve-month period. What is different is the decline in net upsell, which is driving the reduction in net retention.
As I stated initially, this is driven by excess capacity from the last two years, as well as lower than planned use of video rooms. This is also hit by the $2 million one-off. The positive is that churn continues to decline and is now at 9.2%, 0.5% lower than it was in Q4. With our current growth rate, we do recognize that we don't have the trajectory to reach $300 million in ARR by 2024. Compared to when we set the target in 2020, the niches where we find success have changed, and the timing of growth in the areas where we find success is more unclear. Especially in critical video meetings and in Video Enablement , the customers themselves and the opportunities are on average larger, requiring more complex decision processes.
On the positive, video is a more critical component in these areas, and technology leadership is a more important success factor, which works in our favor. As a consequence, we will adapt our growth plan and our targets. We target an accelerated return to profitability through both growth and lower costs compared to the previous strategy. We target being EBITDA positive in Q4 of 2022 and for the whole year of 2023. In retrospect, this change could and should have been a part of the refocus of the strategy, and as a consequence, we could have been a quarter or two earlier to implement it. We will use the next few months to build an updated growth plan and target, and we will update the market with this later this year.
It is disappointing to announce that we are decommitting from the $300 million in 2024 target, and we take responsibility for not delivering on the previous strategy. It's still important for me to point out that we are excited about the growth opportunities for Pexip in the future. We see it in the demand for secure communication platforms. We see it in digitalization of customer engagements, in courtrooms, and increasingly for frontline workers. We are very excited about pursuing those opportunities, helping make the world better using video. Going forward, we will balance growth and profitability in a better way than we have done over the last two years, and we're confident in combining the two, as it's also what we did in the years prior to our IPO.
Last point before we go to Q&A, we have our annual general meeting on April 21, before having our Q1 quarter presentation on May 12. With that, I thank you for your attention, and we will open for questions from the analysts. We will now unmute your microphones, so we'll open just shortly. Thank you for participating, and we will open with Øystein Lodgaard from ABG.
Hello, thank you very much for taking time for my question. I wanted to ask about the new plan to reach profitability. Of course, it's you haven't formulated a concrete plan yet, but I just wanted to hear your thoughts about will this mostly be driven by reduced hirings, or will you also look into your cost structure and see if there are some initiatives you could do to reduce your cost base compared to what it is today?
I think at this point, we won't exclude any options. Overall, it will mean a reduced cost level compared to the previous strategy. That will be driven by reducing hirings, but we will also look into other areas for efficiency.
Of course, with the war that's going on in Europe right now, within Ukraine, cybersecurity is one of the topics that have been put on the agenda. Have you seen any increased interest or demand from customers for critical video solutions?
Yes, we have. We see this especially in Europe, in multiple countries with both government agencies, but also providers of critical infrastructure. We do already see that these are longer sales cycles that won't come in place within a few months after a crisis, but it has to a large extent increased the awareness of geopolitical tensions and the need for resiliency in case of crisis. What is clear, though, is that for some of the surrounding countries, even though the need is now very clear, it's also meant that their focus and priorities has been around maintaining their existing operation and not start on new projects. I think over time, this will be a huge catalyst for the growth of critical video meetings.
Very interesting. Lastly, you showed us in a previous presentation the ramp-up on all the new salespeople that you've hired. Could you maybe give us an update on the status of these new salespeople? How much are they contributing? 'Cause it seems that they're still not maybe fully ramped up and contributing to the growth yet.
That is, in part true. I think one of the levers that we need to get in place is to make sure that our new team is ramping up and contributing as they need to. It's also in part driven by our existing teams going into the segments of growth that are now different from what it was two years ago. It's not just down to new hires. It is also about making sure that we now target our sales teams towards the areas where we find success. Those are also areas where we have less visibility in terms of the timing of that growth because it is in general more complex processes.
Are there any countries or areas where you see a potential to reduce staffing and that could also maybe help you accelerate the path to profitability?
We are going through this at the moment. On an individual basis and for teams looking for areas of efficiency and improvement is a key focus for us. It has been in the past and it continues to be so.
Thank you very much. That was all my questions.
I welcome you, Christian. Do you have any questions?
Yes. Thanks a lot. I was just to make things clear. You state that the partner margin adjustment will lead to a positive effect during the rest of 2022 more than $4 million. Is that on a net basis or just increase in ARR?
That is on an increase in ARR from our current position.
Okay.
We expect this one account to be a net, $2 million+ opportunity for us for the whole of 2022.
Okay. My second question relates to you also state that you're expecting EBITDA profitability in Q4 this year. That quarter, you have a high share in Infinity sales. I was just wondering if you could say anything about on a run rate basis when you expect to be profitable just assuming the ARR and 9% gross margin.
Yeah. I think we will have a positive Q4 in terms of EBITDA. That's a clear target for us, and we've also shown in 2021 that we will be profitable in Q4. Then we will be run rate positive from that point on. For 2023 as a full year, we will be EBITDA positive. There will be seasonal variations because we do have fluctuations in terms of revenue recognition. From that point on and for 2023 as a full year, we will be EBITDA positive.
Okay, thank you. My last question here is, when will these updated growth strategy and hiring pace, when can we expect some more granularity on that?
We are now working on that plan as we speak. We also need to onboard our incoming CEO. When we do give a new updated target, we want to have that as a thoroughly built-out plan. We'll come back with that later this year, sometime over the summer.
Should we expect the FTE growth plan for 2022, you stated 80 to 100, I think, or 80 to 120. Should we expect that to come a lot down or, I'm just trying to figure out the applied growth rate here.
Yes, that will come down to what extent we need to now work through. We do expect to have a lower growth in that count and in cost to make sure that we do fulfill our promise to be EBITDA positive for the full year of 2023.
Can you say anything about how many employees you were at the end of this quarter and how many you see in the pipeline for the end of the second quarter?
In terms of Q1, we were roughly 550 employees towards the end of Q1, which is up some just below 15 compared to the 535 that we were at the end of Q4. In terms of the development going forward, that's part of the plan that we are now making, so we'll come back to that at a later point in time.
Okay. That's helpful. Thank you.
Thank you, everyone. Are there any other questions? Any questions from the chat?
No.
Not at this point. I thank you so much for your attention, and looking forward to seeing you on the Q1 quarterly presentation on May 12. Thank you so much.