Good morning, and welcome to this presentation of Pexip's Third Quarter Results. My name is Trond Johannessen, and I am the CEO. Together with me here in our Pexip studio at Lysaker, I have our CFO, Øystein Hem, and our Chief Revenue Officer, Åsmund Fodstad. Together, we will take you through the highlights of the quarter and our current focus. I do not have a clicker. Oh, you are clicking. The standard disclaimers apply as usual. First, a few words about Pexip for those new to the company. Pexip has, over the last couple of years, transformed into a secure video technology and infrastructure specialist. We are a pure software company with a strong focus on deployment on premises or in private clouds. This is relevant for organizations that have limitations on the use of public cloud infrastructure for reasons such as data control or custom requirements.
Around 75% of our customers are in industries with specific focus on data security and data control, and around $80 million of our ARR is linked to these use cases. Driven by strong market trends, we are seeing close to 30% annual growth in our Secure Meetings area. Pexip works in close partnerships with other companies in our industry, both to provide solutions for them and as integration partner in a larger ecosystem. We are proud to have some of the largest and most security-oriented companies in the world as our customers, and we continue to broaden our footprint across the globe based on strong references and unique technology. Now to our performance in Q3, and it is great to see that the positive trend from the previous quarters continues. Total ARR continues to grow and ended at $143.5 million out of Q3.
Year-over-year, the ARR growth was 17%, and the main growth driver continues to be Secure & Custom video meetings. 12 months rolling EBITDA reached $44.9 million, which corresponds to 56% growth since Q3 last year and a margin of 32%. EBITDA in the quarter has doubled since Q3 last year. Free cash flow ended at $43.7 million for the last 12 months, a 53% increase since Q3 last year. For Q3 alone, our cash flow was three times higher than last year. We take this performance as evidence that we operate in attractive markets with good products and a strong market position. Now, let me elaborate a bit more on our market position with focus on the Secure & Custom area. There are basically three global trends that help drive the demand for Pexip's products around the world.
Number one, individual countries need to control their own critical IT infrastructure and software themselves. This means establishing private clouds and on-premises infrastructure with a corresponding need to have software that deploys well in these environments. Number two, video usage continues to grow in key government areas such as defense, health, justice, and classified communication in general. This requires software that can easily be tailored to the various workflows in these areas and that integrates well with other systems in use. Number three, new technologies such as AI and quantum computing continues to threaten traditional encryption and data-centric security measures. This increases the need for secure and compartmentalized IT solutions to ensure business continuity and limit the consequences of data breach. The main reason why Pexip finds success in a world dominated by these global trends is that our technology is extremely well-suited for the corresponding IT requirements.
Pexip deploys well in all infrastructures, from on-premises to global clouds. We integrate well with other systems and enable modularized approaches for maximum flexibility. Pexip is designed, tested, and verified for the highest levels of security and can be tailored to the exact security requirements of any organization. Finally, Pexip has a modern and customizable user experience that meets the requirements of demanding end users. Based on these strong technology differentiators, Pexip is going to market with three main commercial applications. The first is, of course, our Secure Meetings product suite. This includes everything from standard video conferences to tailored video workflows within justice, government, and health, often integrated with other collaboration solutions. Second is interoperability in its broadest sense.
We have solutions to connect any device, room, or app to any meeting platform, and also to ensure cross-platform AI connectivity, such as bringing your AI agent to cross-platform meetings. Third, Pexip has solutions for processing of real-time media streams, also outside of your traditional meetings context. Connecting, processing, analyzing, and distributing video, audio, and other data is something Pexip is increasingly used for in verticals such as defense and health, also in tactical use cases. This can be done faster, cheaper, and simpler than before with Pexip as the connecting technology. To illustrate the possibilities and flexibility of the Pexip platform, we have put together a short demo video with examples of what the Pexip technology is capable of. This includes, as you will see, AI features and AI platform integration possibilities. Snuff in.
Imagine a secure meeting platform with all the modern capabilities of anything in the cloud, but entirely under your control. Real-time AI summaries, live translation, tasks and decisions with your own private AI from Pexip, or whichever AI model you already trust with your data. Mistral, Llama, Aleph Alpha, and countless others. Because your data should never have to leave home. It is not just on your desktop, it is everywhere your organization communicates. In every room, on every device, from any feed, on one private platform with no limits. It is connected to everything you already run your business on. Identity providers, healthcare records, chat and recording platforms. A secure meeting platform that integrates seamlessly with the tools you already trust. It is built around you so that you can do more than just meet. It can work the way you work.
Automations, approvals, process and business logic that are entirely your own. Imagine deploying where you want. Air-gapped, sovereign, and entirely private. It is your call. Pexip security is built for what is next. Zero trust architecture, policy-based authentication, and post-quantum encryption. A secure perimeter around all of your data. It is the future of Secure Meetings. It is Pexip, and it is built around you.
I hope you like it. Because of all the things I have just described, Pexip has become a, or perhaps the global leader in secure video communication. Our flexibility within both infrastructure and integrations sets us apart from other players and make us the natural choice for those organizations that have restrictions on the use of public cloud platforms. The early adopters are within defense and national security, but the more general government and healthcare sectors are not far behind. Now, I leave it to Åsmund for some more details on the commercial side.
Thank you, Trond, and good morning, everyone. I am pleased to present another strong quarter for Pexip, demonstrating solid execution from the Pexip team. Let's look at the details. Pexip delivered 10% year-over-year growth in Connected, alongside with a solid 27% growth in Secure & Custom. These results reflects the strength of our unique technology, the dedication of our teams, and our ability to execute. They also demonstrate the value of our continued investments in Secure & Custom, where we have built a strong track record and a very compelling market position. Pexip continued to expand our customer base with Fortune 500 companies and leading institutions across government, healthcare, justice, national security, and defense. Let's take a closer look at what is driving our success and where we see continued opportunities for growth. We see three clear trends driving demand for Pexip.
First, the accelerating demand for data control and digital sovereignty. In Q3, we secured major wins with the Ministries of Justice and a European police force. Justice is a strong market for Pexip, as customers need technology that supports complex courtroom workflows, from the role-based access and interpreters to secure citizen participation and integrating that with existing court systems. Pexip is uniquely positioned and combines the level of customization with full control over data, deployment, and the different security policies. The second trend is our continued success in classified and mission-critical environments. This quarter, tactical video was an important driver for new business. A major European army selected Pexip to enable video communications in deployed operations, and a European navy signed a five-year contract for secure collaboration for vessels. These environments demand more than secure video.
They require technology that can operate in classified, air-gapped, and challenging network conditions while adapting to strict in-field requirements. These wins strengthen our position in tactical communications, validate a growing market opportunity for us, and create a foundation for further expansion. Let's hear directly from Fabian Forster, he is the CEO of our partner MilDef, on how Pexip and OneCIS work together in these demanding environments.
Everyone is digitalizing their tactical edge. We need to be able to provide more services in the battlefield and make them available for the war fighters. To be able to have faster and better decision-making, we need to have a rich set of services, which includes video collaboration. I am Fabian Forster. I have been working with IT systems within the armed forces for more than 25 years. Everything from vehicle control systems to weapon control systems to applications for supporting air, for supporting land, for supporting maritime. We have created the solution so that these installations can be done autonomously, and you can also select the kind of services you need for your use case. OneCIS is designed to create a common IT foundation from the operational level down to deployed and tactical units, and all the way out to dismounted soldiers.
Having this shared IT foundation makes it easier to create a common situational awareness within your own forces, but also with allied forces. We recently deployed OneCIS with Pexip for one of our naval customers. Very rapidly, they saw the benefit of video collaboration with their maritime command center. We recommend Pexip because it is a trusted supplier of state-of-the-art solution for secure audio-video collaboration. Many nations could benefit from using OneCIS together with Pexip in their deployed and tactical environments. It reduces the complexity through automation, and it creates interoperability within own forces and with allied forces.
Thank you, Fabian. It is great to work with you and your team. The third recurring trend amongst the wins we close is the continued need for premium interoperability. Large organizations rarely operate on a single collaboration platform. They need interoperability to work together without compromising the enterprise-grade user experience. This is where Pexip really stands out, and the Q3 wins illustrate this. A major U.S. insurance company chose Pexip Connect for both Microsoft Teams and for Zoom, enabling seamless collaboration across these different platforms. A large U.K. public sector customer expanded its existing Pexip deployment to include management of all these different video conferencing devices. In summary, the wins in Q3 underwrite the trends Trond spoke to earlier, and the business opportunities they open up for Pexip and our growth ambitions. With that, I would like to hand over to Øystein for all the financial details.
Thank you, Åsmund. Starting with annual recurring revenue, the growth trends from the previous quarters continue. We grew our ARR base with 17% overall, with Secure & Custom being the clear growth driver, growing at 27% year-on-year. Connected Spaces is up 10% and was slightly down quarter-on-quarter. Taking a closer look at Secure & Custom, the growth in this segment has been consistently strong over several years. The growth is a good mix of solid new sales as well as strong net retention, which over the last 12 months has been 118%. We saw the same pattern in Q3 as well, with one-third of growth coming from net new customers and two-thirds coming from existing customers. Connected Spaces has averaged mid-single-digit growth over the last three years.
Over the last 12 months, growth is coming from net new customers, while the net retention rate in this segment has been 89%. We have seen the net retention rate improve somewhat over the last few quarters, and continuing to improve this remains a top priority for us. The growth in ARR has translated into very solid revenue growth, and revenues are up 25% year-on-year compared to the 17% growth in annual recurring revenues. The difference is mainly due to the timing of revenue recognition, and we are seeing a higher share of growth coming from software, which has early revenue recognition, and we also delivered two large multi-year software contracts in Q3 of this year. Regardless, we continue to convert incremental revenue into incremental EBITDA at a strong pace.
In Q3, we converted close to 70% of the incremental revenue into EBITDA, increasing our margin in the quarter with 10 percentage points from 20% in Q3 of last year to 30% this year. A key reason for this is that our operating expenses remained stable and grew only 4% year-on-year. Cash-based salary came in at the same level as last year, while other OpEx saw an increase of $0.8 million year-on-year, being in line with the previous two quarters. On cash flow, Q3 delivered $9 million in free cash flow, up from $3 million of Q3 in last year. This was driven by improved operating cash flow. Over the last 12 months, our free cash flow has been $44 million, and we have returned $44 million to shareholders.
We are maintaining a robust balance sheet, and we have a cash position in line with last year. In summary, revenues are up 25%, and EBITDA is up 105% compared to Q3 of last year. Depreciation is stable year-on-year, while net financials is down due to exchange rate losses, which means that our profit before income tax came in at $7.2 million for the quarter. With that, I hand it back to Trond for our outlook.
Thank you, Øystein. Now to outlook. As described earlier, we maintain a positive market outlook based on the key trends we see in our markets and the unique technology, strong market position, and industry partnerships that we have. Our expectation is that we, in Q4, will have another strong quarter for the Secure & Custom business area, with solid incremental growth in annual recurring revenues. For Connected Spaces, we continue to see a healthy level of new sales and no significant changes in net retention. However, as we speak, we are in discussions with one large customer that became a customer in Q4 last year because of a planned collaboration platform migration, and there is now uncertainty around this platform selection, and this can have a negative effect on the need for interoperability services from Pexip, with a resulting potential 3-4 million ARR reduction from this customer.
Discussions are ongoing and not concluded. This is a single event with one customer that may impact our Connected Spaces growth in Q4, and not something impacting the rest of the Connected Spaces development. As a direct result of this uncertainty, we have a wider range than usual for the quarterly ARR guidance, and we expect to end Q4 with an ARR in the range of $144 million-$150 million. On a higher level and long term, we have updated our financial ambition level and now target to consistently deliver double-digit ARR growth, including a Secure & Custom business area growth rate above 25%. We also target to consistently deliver an EBITDA margin above 30%. Finally, before we go to Q&A, our Q4 presentation is planned for February 11th next year. Now, Q&A.
Thanks, Trond. We'll start with questions from the analysts, and I believe we have with us Christoffer Wang Bjørnsen from DNB. Christoffer, are you there? Christoffer?
He's probably-
Yes. Yes.
Now we can hear him.
Can you hear me now?
Yes.
Yeah, you have to call in two separate ways. On the thinking around the Q4 guidance, I understand you kind of adjusted the lower end of the range for the potential loss of this customer that came in Q4 last year. Is it fair to read out of the range that you're expecting Secure & Custom to accelerate in Q4 to kind of make up for it? Because it's still kind of decent growth that you're expecting for Q4 on the year-on-year basis. So, if that customer churns out, it seems you're expecting a decent quarter for Secure & Custom in Q4.
No, absolutely. Secure & Custom continues to be the main growth area, as you also saw in the quarter we have behind us. Q4 is also the quarter where we normally have lots of large deals in play, and depending a bit on where they land and which side of New Year's Eve these land, it can also be a very solid or a solid quarter. I mean, it's kind of a bit difficult to say right now, but for sure, we expect a very solid quarter for Secure & Custom.
You're falling in and out. I don't know if you can hear me. Can you hear me now?
We can hear you.
Yep.
Yeah. On the new financial or long-term financial ambitions framework, it seems to kind of indicate that you're opening up for having room for more heavy investments or at least some accelerated investments in the go-to-market effort and so on. Can you think about, like, reflect a bit about what has changed? If I'm correct, and you're now planning to invest more in terms of headcount and so on, kind of what has changed to give you the confidence? What kind of opportunities do you see driving this change in framework, which seems to focus more on investing in growth than in the past?
No, I think you can interpret this in several different ways, but I think the most important thing we wanted to get across is that when we have said Rule of 40, sometimes it has been interpreted as it will be in either end of the scale. We will either have very high growth and very low profitability, and that is a risk that you analysts have pointed out, or the other. This is a way of saying that, don't expect it to be in any of the extremes. We will have very solid growth, and we will have very solid profitability, but obviously having room to be able to invest into the areas where we need to invest to maintain the growth rate that we see in the market and to sort of capture the momentum that's out there. So, don't read too much into it.
We're now stating a separate growth target for Secure & Custom, also to illustrate that this is definitely the main growth driver, and the one area that we believe will be developing the most positively going forward.
All right. Then finally from me, you've kind of seen over the last couple of weeks some developments with players like Microsoft, Cisco, and Zoom launching, or at least stating that they'll focus more on driving native interop. Can you kind of reflect a bit on how you think about that, and if you've gotten any initial feedback from customers on how they think about the need for Pexip in this world where there is more native interop between the big guys?
Yes.
You can comment on this now.
Yeah, so I think what Microsoft have announced is a clear ambition for their Direct Guest Join product to add some of the features that customers have requested. The feedback we've gotten so far is that I think there's some uncertainty around when these features will come.
Yeah.
As such, it is very difficult for us to say what the impact will be on our sales. That is what we are hearing both from customers and partners as well. I think what it shows us is that we will continue to need to improve our Connected Spaces offering to keep ahead of competition, which I think is the sort of baseline expectation in any market.
We have plans for that, right? The baseline here is that there will be more than one platform in the market. Interoperability will continue to be important, and Pexip will play a major role in the interoperability space going forward. The credibility around or the belief that Direct Guest Join will all of a sudden be a great product, which has never been in the past, among the players that we talk to in the market is relatively low.
All right. Thank you. That is all.
Great. No, but thanks a lot, Christoffer. With that, we will round off the Q&A session and see you next quarter.