Good morning, welcome to this presentation of Pexip's Second Quarter Results. My name is Trond Johannessen, and I am the CEO. Together with me today in this fantastic new studio here at our headquarters at Lysaker, I have Øystein Hem, our CFO, Åsmund Fodstad, our Chief Revenue Officer, and Christine Arnesen, our Head of IR. Together, we'll take you through the highlights of the second quarter and what we're focusing on. Standard disclaimers apply as usual. To the highlights of the quarter. Over the last quarters, Pexip has been through a major transformation. This has resulted in a focused strategy where we drive technology leadership in the markets where we can be really unique and differentiated. It has also resulted in a more efficient organization and a significantly reduced cost base.
Going forward, we will continue to optimize and improve our operations to ensure solid profitability while maintaining growth capacity. As for the 1st quarter, the results of this transformation are clearly visible in our Q2 performance. Q2 revenues came in at NOK 233 million for the quarter, which is 19% up from the 2nd quarter last year. Our total annual recurring revenue base grew $0.4 million during the quarter and is now at $98.7 million. EBITDA for the 2nd quarter came in at NOK 8 million , which is NOK 105 million improvement since the 2nd quarter last year. Cash flow, positive cash flow, we added NOK 42 million to our bank account during the quarter. Our cash balance now is at NOK 508 million .
We have a good start on the relationship and cooperation with Poly. This means we have high joint sales activities and marketing activities across all regions. The pipeline is developing positively, and we have also closed the first sales. On the technology side, we have launched direct calling from an MTR to another video endpoint during the quarter. We also launched SIP Guest Join officially, and we're in the process of piloting AI-powered translation functionality and other functionalities in cooperation with NVIDIA and some large customers, as we speak. We maintain our target of 20% growth in Secure & Custom Spaces, and an overall flat to positive development in ARR for the whole company in 2023. EBITDA target also remains unchanged at NOK 100 million-NOK 150 million for the year.
On the cash flow side, as we have already reached our cash flow target for the whole year during the first half, we are increasing our annual target to NOK 85 million-NOK 100 million for the year. This means we target positive cash flow also in the second half, but at a lower level than in the first half. Let me take this opportunity also to quickly recap what Pexip is all about. Pexip is a technology company built on unique technology, technology that is increasingly relevant in today's world. We do transcoding or centralized data processing, and that means that we can install a full-fledged video collaboration solution on the server in the basement in any data center or sovereign cloud. No other provider in the market can do that today. We enable everything from business communication to ultra-secure government meetings, doctors' appointments, and court proceedings.
Our proven and unique technology is also what attracts partnerships with some of the largest technology companies in the world. As you know, we work closely with companies like Microsoft, Google, now NVIDIA, and others. This is also what has triggered the partnership with Poly, which I will say a few more words about. The partnership with Poly means that Pexip is Poly's provider of three new video infrastructure solutions that will replace their current RealConnect and Clariti solutions that they sell today. The three products, Poly PrivateConnect, CloudConnect, and FedConnect, will all be powered by Pexip and branded as powered by Pexip. For us, this means that our market share in Connected Spaces is likely to increase.
Together, Poly and Pexip can now offer a competitive bundle as an alternative to Cisco. In practice, it's only now Pexip, Poly, and Cisco that offer interoperability solutions for Microsoft Teams in the market today. Within the secure meetings segment, we will significantly broaden our reach with this partnership with Poly. The market for self-hosted solutions is developing positively. Poly is working with many very security-conscious organizations out there. They will now be offered a Pexip-powered, self-hosted video solution instead of the Clariti solutions they have been offered previously. In the government space in the U.S., we also see potential for growth together with Poly. The recent FedRAMP and StateRAMP certifications underpin that to a large extent. I'll get back to that in a second. All in all, there's a lot of opportunities coming out of this cooperation with Poly.
Also in the second quarter, we have been busy on the technology side. Our engineering team has been working long hours to keep our pace of innovation at a high level. We have introduced new features into the market, as we also did in the first quarter. I can't go through everything here, but let me give you 2 Q2 highlights. SIP Guest Join, we introduced that to you already in the first quarter presentation. Now it is launched. It's a great new feature. It means that any Pexip Connected Spaces customer can now join any Microsoft Teams meeting, regardless of whether the person that invites to the meeting is a Pexip customer or not. It broadens the usage area for Pexip substantially.
Direct calling for Microsoft Teams Rooms, this is the first Pexip-powered solution that increases the usage area for a Microsoft product. It adds new functionality to a Microsoft Teams Rooms. AI is a big thing. AI-enabled features are improving the user experience and enable new functionality, such as live translation, gaze correction, and noise cancellation. We are working closely with NVIDIA to further take advantage of this technology in Pexip's products today, and let me give you some more details on how we are doing this. NVIDIA and some of our largest customers have seen a need to take advantage of AI technologies that they have otherwise been prevented from using, since many of them are prevented from using public cloud services.
What we can now do is that we can pilot, we can-- you can do live translation based on AI technology without connecting to a public cloud service. This is because Pexip's server-side processing technology enables these AI features in private or sovereign clouds and even self-hosted environments. This is something that some of our large public sector customers really have been looking for, looking for, as data privacy and control are their top priorities. The savings some of these organizations can get from the, from reducing the use of human translators are enormous. The more common features, such as noise reduction, gaze correction, screen composition optimization, and so on, are also on the roadmap. Recently, we launched a short video that gives some more details on what we are doing together with NVIDIA and Oops! What happened there?
Recently, we launched a short video and a blog post that gives more details on what we're doing together with NVIDIA on the AI side. The video is available on YouTube and through our website and on various social media channels. So take a look at that if you want to get some more insights into what we do here. A few words about our business and our business areas. Our focus is really on two attractive markets, where we see that we can take leadership positions based on the unique and differentiated technology that we have. We take a very collaborative approach to the ecosystem, and we aim to be partnering with leading technology players to complement their solutions and broaden the reach for Pexip's technology.
I strongly believe that Pexip's market and technology positions have been strengthened during the second quarter within both Connected Spaces and Secure and Custom solutions. Within Connected Spaces, the new features launched recently, together with our FedRAMP approval and Poly partnership, have solidified our position as a leader. We also understood this week that BlueJeans has communicated a withdrawal from this market, which could open up an opportunity to further increase market share. Within Secure and Custom, the uniqueness of our flexible hosting functionality, the increased focus on data security, privacy, and control, and of course, the new relationship to Poly, give us a leadership position in a market that is developing very favorably. Let me illustrate the relevance of the secure and private solutions with an example from Norway. In May, the Norwegian National Security Agency, NSM, published their updated security recommendations for Norway.
This covered a lot of areas, including cybersecurity and digital infrastructure. The recommendation with respect to avoiding public cloud services and instead establish national and regional data centers for data worth protecting is crystal clear. Norway is not unique in this respect, and there is an increasing awareness across countries on establishing secure and sovereign data services for public services. Several countries are issuing specific recommendations and regulations in this area. Pexip has a unique capability to serve this market due to our self-hosted offering, allowing customers or Pexip to easily host multiple private and sovereign solutions. In the U.S., our government cloud solution that was FedRAMP and StateRAMP authorized in Q2 is developing well. This solution allows U.S. government customers to use a Pexip-provided cloud service, called Pexip Government Cloud, as a supplement to our self-hosted offering.
The initial offering is focused on Microsoft CVI interoperability within Connected Spaces, we're working on adding more features and products to this cloud based on customer feedback that we have received. The results so far are solid. We have already booked around $700,000 in new ARR under the FedRAMP, StateRAMP authorization, authorized products. There is a pipeline of another $2 million that we're working to convert going forward. Since the second quarter last year, we have been through a major transformation. As a result, we now have a focused strategy and a cost base that is adapted to our revenues, with a resulting positive EBITDA and positive cash flow. Q1 was strong on profitability and cash flow. The same goes for Q2.
Year to date, EBITDA is up NOK 187 million to NOK 43 million this year. We are on track to meeting our 2023 EBITDA target of NOK 100 million-NOK 150 million. We are really proud of the turnaround we have done. The resulting focused strategy and profitable operation, together with an extremely competent organization, constitute a very solid platform to build profitable growth on. Building profitable growth is exactly what we plan to do. Now, I leave it to Åsmund to give you an overview of our revenues and sales achievements during the quarter.
Thank you, Trond. Let's move into sales, and good morning to you that's out there live. Let's look at the sales figures and some updates on the different segments. It's, number one, great to be back to growth as we increase the total ARR base to $99 million in Q2. That is actually up from a negative minus $1.3 million in Q1 to a positive $0.4 million in Q2 2023. We also have a very good geographical mix, which continues with a strong development in the Americas. It's also noticeable that the first sizable order from the HP Poly partnership also came from North America. Let's look a little bit more in detail on the different segments that Pexip works and sells in.
For Connected Spaces, 1, Pexip keep on winning major Fortune 500 logos. In Q2, we sign up the 3rd largest telecom provider and the biggest gold mining company in the world. They basically choose Pexip for 3 major reasons. 1, these large corporations have multiple technologies, complex in environments, and have the need to have the same user experience, no matter these different technologies. The Pexip solution resolves exactly that. Secondly, we win with the best-in-class technology and the right feature set to make multiple technologies and meetings simply work. We also see that through user adoption from some of these Fortune 500 customers, where they go from zero to more than 30,000 meetings per month on the Pexip multi-platform solution.
Thirdly, our unique cooperation with Microsoft, we basically team up with them to win these large accounts to outcompete both Cisco, Zoom, and others. Our cooperation and unique certified solutions by Microsoft is essential when these corporations make their decision on which technology to standardize on. Further on, like Trond also explained, we continue key innovation for Connected Spaces, so we stay ahead of competition. Again, certified and in close cooperation with Microsoft. Looking at the Secure and Custom, these segments continues to be growth segments for Pexip, with a 5% and 7% growth in Q2 and a 14% growth year-over-year. As in Connected Spaces, we keep on winning major logos with our secure and custom solutions, and very often these two go very much hand in hand. Again, that's unique for Pexip.
In Q2, we won significant logos and had large upsell, both within healthcare and with different government agencies. These markets are growing markets and represent a solid future potential for Pexip. It also confirms that Pexip has an established technology leadership position in the market, and as Trond mentioned, at latest now, also with a StateRAMP authorization. We keep on getting certified and getting authorized government body by government body in this, these segments. Deep diving a bit more on the breakdown of ARR and the different dynamics in these two spaces. For Secure and Custom, strong upsell to existing customers for both Secure and Custom. That, in a combination with very low churn, result in a strong net retention rate of 104% for the quarter. Pexip are delivering as guided in this area, and we do see further growth in this space.
For Connected Spaces, it's somewhat of a different dynamic. We have a strong new sale of $1.9 million to new customers, which also underline that we have a unique solution for a multi-platform environment. In Connected Spaces, we see that churn is somewhat higher, resulting in Q2 with a near 96% net retention rate, excluding the legacy areas. HP Poly is starting to give results with a strong pipeline in this segment, we have also seen the first PO on just after 60 days after launch for Connected Spaces. With that, I plan to give it over to Øystein for more financial details.
Thank you, Åsmund. Let me start off with the headline numbers. As Trond outlined in his introduction, we're continuing to show a clear improvement in profitability, with a substantially better EBITDA than the same quarter of last year. In Q2, revenues grew 19% to NOK 233 million. Around 14 percentage points of this growth is driven by a beneficial currency exchange rate, meaning that the underlying growth is around 5%. Quarter-over-quarter revenue is slightly down from Q1 due to lower software revenues, which is the same seasonality that we saw in 2022. On EBITDA, the majority of our costs are also in foreign currency, so part of the positive currency impact on revenues is balanced out by the negative impact on cost.
The improvement in EBITDA is therefore mostly a result of the underlying cost reductions over the last 12 months, although the underlying revenue increase is also contributing positively. The EBITDA improvement is stronger than in Q1, although EBITDA is down from NOK 35 million in Q1 to NOK 8 million now in Q2. This is due to the expected revenue seasonality, where typically Q1 and especially Q4 are the strongest quarters for Pexip. In terms of operating expenses, we continue to realize cost reductions, and we have a reduction in both salary and personnel expenses, as well as in other OpEx. The main driver behind this is the reduction that we did on cost in Q4 of last year, and we see now the impact of that having come through more or less in entirety. This reduction is partly offset by the impact of currency fluctuations.
On other OpEx, we continued to have a noticeable quarter-over-quarter reduction and a material reduction compared to Q2 of last year. This is mainly a result of lower sales marketing costs, as well as lower costs to consultants. Looking at cash flow, the resulting cash flow is a net positive of NOK 42 million for the quarter, taking us to NOK 88 million so far this year. EBITDA, excluding non-cash cost, is a key contributor to this. We also had an improvement in our net working capital, and we have reduced the level of overdue receivables so far in 2023. Our investment costs at NOK 9 million were also lower in Q2, mainly as a result of lower consulting costs in development.
All in all, we have overachieved our cash flow target so far in 2023, which is why we are increasing our free cash flow target from NOK 40 million-NOK 60 million to NOK 85 million-NOK 100 million. So far into the year, we are at NOK 82 million after the first half, using our definition of free cash flow, implying that we do expect a neutral to positive cash flow for the second half. The seasonally lower cash flow in the second half is mostly due to revenue seasonality, as we invoice more in Q4 and Q1, which we then collect in Q1 and Q2. On cash outflow, we expect that to be at a lower level than it was in the first half due to our lower cost base.
Looking at the P&L in its totality, we have positive development on revenue, a positive development on cost of goods sold, salary cost and OpEx. On cost of goods sold, that positive development is despite of a significant increase in traffic on our cloud services. In total, these results gives us a solid lift in EBITDA. Also, since we have lower restructuring costs now than we did in 2022. On reported EBITDA, the net improvement is NOK 132 million compared to Q2 of last year. This quarter, we also had a negative NOK 1 million in other gains and losses related to the termination of a contract, which will give us lower costs going forward. We continuously seek to optimize our operation, and I do expect some other losses related to this also for Q3.
This quarter, we also had higher depreciation due to one-off write-off, of capitalized R&D tied to a discontinued product, as we continuously focus our strategy and operation. Lastly, we continue to benefit on net financial income from, the currency exchange fluctuations, as we collect cash at a higher exchange rate than what it was originally booked against. All in all, this gives us a net loss before tax of NOK 25 million. With that, I give the word to Trond.
Thank you, Øystein. Looking at our business overall, we are generally optimistic with a positive market outlook across the business areas. Market trends, particularly in the Secure and Custom area, are positive and present opportunities for Pexip. The Poly partnership and FedRAMP, StateRAMP authorizations are expected to give additional positive momentum in the second half of the year. For cash flow, we exceeded the annual target, as Øystein said, during the first half, and we have revised our annual target to NOK 85 million-NOK 100 million for the year. The other financial targets remain unchanged, and as explained through the presentation, we are on track to meeting them. Finally, and as usual, we will shed some light on how we think about our ARR development in the quarter we are currently in, the third quarter.
Our best estimate here is that we will end the third quarter in the range of $98 million-$101 million in ARR. With that, the last point before we go to the Q&A. On November 2nd, we will be back presenting our third quarter results. Now, Christine, I guess we have some questions. Hope we have some questions.
Thank you, Trond. Yeah, we'll start with the questions from the analysts that are with us live. We have with us, Øystein Løberg from ABG. Any questions from you, Øystein?
Thank you for taking my questions, congratulations on a solid report today. I wanted to start with a couple of questions on the Connected Spaces segment. A couple of days ago, news broke that BlueJeans is likely to be shut down. They, of course, being a smaller competitor in the CVI space, but it's been a pretty big shift in the cloud video interop market now, with going from four to two players in a relatively short while. Can you say something about how you expect that to change things for you?
You wanna go, Øystein?
I'm happy to, to take a stab at it. I think short term, this means that there are quite a few customers out there that now have a provider that has notified them that their product is going end of service in a reasonably short, short time. For us, this is an opportunity to be out there and help those customers and help our partners in transitioning over to a solid, long-term product, which we can provide. I think short term, this is an opportunity for us in terms of grabbing some of that, that, that market share over the coming, coming few quarters.
In the long term, I think, with Pexip and Cisco being long-term specialists in this field, with, to be fair, Pexip having this as our core focus, which is somewhat different, gives us a good position to continue to sort of be that technology leader, and stay ahead of competition now that it's basically a two-horse race.
I think also it underlines the importance of the partnerships that we have been working hard to establish. The way we work with Microsoft, the way we work with Poly, is, is giving a, a strength to our solution and our market approach that is different from what you will achieve standalone.
Okay, thank you. Maybe you could give some update on the progress with Poly. You've now been working with them for a few months. When do you expect to start to see revenues come in? How do you see the potential there? Is it, let's say, bigger or smaller than you originally thought?
I can start. You can.
Yeah, sure.
You can fill in. I think from a, from a pipeline point of view, as you mentioned during the presentation, I think we are seeing a stronger pipeline development, and we, and a faster buildup of pipeline than we originally expected. We have already closed the first three, four deals that we have in our books, but the conversion of the rest of the pipeline is naturally gonna take some time. This has to do with, you know, the, the end of sale of the current Poly solution wasn't until the end of last month, so it's only been now a week plus, where actually the Poly sales force has had only the Pexip Poly solution out there to provide to the market.
We do expect it will take some time to convert this pipeline into real orders. We're working particularly in the, in the public sector. As you know, the sales cycles are longer than in the private sector, but the, but the solidity and the quality of the pipeline that we have, I think is stronger than what I expected.
Yeah, if I can add, I think you're answering in a good way. Have we never seen, you know, such a pipeline in such short period of time? It's all tangible, it's existing customers, right? We not necessarily build them up, but, but again, to your point, we have long sales cycles. We've never seen, PO after the 60 days with, with a corporation either, so it's easy to get excited, which we are. We need somewhat more time to see how much are we able to kind of close before being able to kind of be even more optimistic about the, the partnership. It's developing really, really well.
Yeah, very, very interesting to hear that the, the pipeline is building faster than you, than you originally thought. Lastly, on the Connected Spaces segment, there was, If we go a bit back, Cisco and Teams and Microsoft, they launched the opportunity to run Microsoft Teams natively on new Cisco hardware. Have you, have you seen that impacting your business to any degree yet? Or, or have you have any comments on that?
I think if, if I was to add a comment on that, I would say that we definitely see a fair number of customers opting for Microsoft Teams Rooms. That's not I wouldn't say that's accelerated now after the Cisco Microsoft Teams announcement. On the existing base, the impact so far hasn't been noticeable. So far, we don't really see a big impact of it, but we continue to see a fair number of customers that opt for Microsoft Teams Rooms, as well as a fair number of customers opting for SIP endpoints.
And we see- we see that also versus maybe the last two years, where it's been a massive Microsoft wave, if I can put it that way, but also in the meeting room space, is that also the multi-platform, which basically means keep your already in investment. Make sure that the, the meeting rooms are the same, no matter if they are MTRs or the SIP endpoints, resonates a lot with large government institutions and also the, the biggest enterprises. It's a somewhat different picture on a positive note for, for Pexip.
That's good to hear. The, the last question from me is on the guidance for, for Q3, guide for, for rather limited ARR growth in, in Q3. Is that driven by some seasonality or, or, any other factors impacting that?
I think the, the, the guiding range, we, we, we have been trying to give an as accurate picture as possible. You know, we are working on some relatively large deals every quarter, and if they swing into the quarter or out of the quarter, it makes a big impact on this actual delivered number. That's why there is a range. The range now is higher than the one we presented for the quarter we're in, so we're kind of signaling a modestly positive outlook in that respect. To be more accurate than we are now at this point is difficult.
Thank you very much. That was all from me. Thank you.
Thank you, Stein. We have also received a few questions, via email. First question: "What is your perspective on artificial intelligence, AI? Do you believe it could potentially impact subscription growth negatively, or do you see it as having a positive influence on the video conferencing industry?
I will try, I will start, and you will help me. AI is impacting every industry and every technology, company out there. Video is, of course, you know, c- well catered to take advantage of many of these AI features, but it, it, in, in some cases, it comes at a cost, right? Just having AI functionality available, having these learning AI engines running requires a lot of data. Many organizations are very concerned about how that- how their data is being used to train AI engines and, and to, to. Even if it gives better functionality, you know, what is actually happening to the data? The awareness around this is increasing every day. That's why we at Pexip, we try to let organizations take advantage of AI technology and still maintain data privacy and control.
This is really, you know, it's a balancing act, but. That's why we, together with NVIDIA and together with some very large customers in the public sector, try to find ways to balance this and make good solutions work. To make AI technology available to these organizations. In general, AI has a lot to provide to, to video conferencing and, and collaboration, no doubt about it, but it's, it's this balancing that's important.
I think, again, it speaks to the Pexip's uniquenesses, right? That also artificial intelligence really fits well into solutions that we already have, especially in Secure and Custom. Also easy to get excited on, as an example, which we are demonstrating these days on event translation services and so on, where you actually prefer to have a video meeting versus a physical meeting, not only because of the cost saving, but because it's actually a better meeting. It speaks well to the potential of, of video going forward.
Thank you. Can you also comment on the criticism against Zoom and the challenges with AI on privacy?
I guess it's exactly that point, right? I mean, of course, Zoom is trying to make it the best possible functionality for their users and customers, but, you know, to do that, they need a lot of data, and some organizations are concerned about the way that data is being used, and this is a problem we're trying to solve with our more closed solutions.
Thank you. Last question via email is regarding the FedRAMP approval. "How does the company capitalize on this? You are the, or we are the only approved video solution as of now. Does that mean that everyone with a certain level of security must switch to Pexip, or are the big players forced to bundle Pexip solutions into their system?
The, the way that the FedRAMP works today is it's actually a sovereign cloud, number one for North America, currently, which means that any government agency, within U.S. can use the Pexip solution. number one, we're, we're the only one with that, the FedRAMP authorization with Microsoft CVI. They don't have to, but there are also quite some of the government institutions that have regulations, so it's actually forcing them to use these kind of communication solutions. It's a mix, but, but more and more of them are going that way, again, because of sovereignty and because of privacy and security.
Of course, it, it's the market is connecting to Teams meeting, basically, right? All these government or in the government organizations in the U.S., they have all these video meeting rooms, all these SIP-based endpoints that they want to connect to Microsoft Teams meetings with. Now the only secure way they can actually connect to a Microsoft Teams meeting is by using.
Pexip.
Pexip interoperability functionality on those SIP endpoints. We believe that that market is there, and it's gonna be growing for us going forward.
Thank you. I think with that, we conclude the Q2 presentation. Thank you very much.