Welcome to ACQ Yubico Q2 Report 2023. For the first part of the conference call, the participants will be in listen-only mode. During the questions and answer session, participants are able to ask questions by dialing star five on their telephone keypad. Now, I will hand the conference over to CEO, Henrik Blomquist. Please go ahead.
Good morning. My name is Henrik Blomquist. I am CEO of ACQ Bure, and welcome to today's presentation of ACQ's and Yubico's results for the first half year. Today's presenters will be, beside me, the CEO of Yubico, Mattias Danielsson, the Co-founder and Chief Evangelist, Stina Ehrensvard, and CFO, Camilla Öberg. The 19th of April this year, we announced the merger between ACQ and Yubico. Since then, the shareholders has also been voting for this transaction at an extra shareholders meeting in June. On that note, today's presentation will be mainly about Yubico and the result of Yubico. I therefore leave the word to CEO of Yubico, Mattias Danielsson.
Thank you, Henrik. Just wanted to do a short recap for those of you who are not familiar with Yubico yet. We're active in the cybersecurity industry. More specifically, we're a leader in global authentication, password authentication. In terms of how we look today, is that, in terms of size, we had net sales of approximately SEK 1.6 billion last year in 2022. We're a company of about 400 employees today, and we serve more than 4,500 enterprise customers since inception, plus millions of consumers. On that note, we're proud of our customers, and it's worth noting that already about almost a third of the Fortune 500 customers are customers of ours in some shape or form.
We'll talk a little bit more about that, later. Our core product is the YubiKey, which is used for strong authentication, and for those of our customers that have implemented our product correctly, they've had exactly 0 account takeovers because of using our products. That's, of course, something that we're very proud of, and that fosters, of course, returning customers. To give you... We're a hardware company, fundamentally, we're selling the YubiKey, but there's a lot of software associated with this and services, and this means that we've been able to maintain a healthy gross margin over the years. Our target and, and what we've historically been able to deliver has been in excess of 85% in gross margins.
In terms of size, since the company was founded, we've sold and deployed about 22 million YubiKeys to date. With that, I'll hand over to my dear colleague and co-founder, Stina, who will tell you a little bit more about how we got here and what the market and the future looks like.
Thank you, Mattias. Jakob Ehrensvärd, my co-founder and I, we started Yubico in 2007 in Stockholm. Our name is inspired by the word ubiquity and the vision of enabling one single key to securely access all internet services. To make this vision happen, my co-founder and I, we moved to Silicon Valley, where we have pioneered and co-created the new global FIDO Passkeys cybersecurity standard, today, supported by Google, Microsoft, Apple, the White House, and hundreds of top online services and governments around the world. Earlier this year, Jakob and I moved back to Sweden. I handed over my CEO job to Mattias, and we are today extremely excited, as we've been invited to help shape the next generation European identity system. Here is a summary of the different cyber threats.
Yubico cannot address all of them, but we can help protect against the most common, phishing and account takeover. 90% of all cybersecurity breaches involves a stolen login credential, a password, or other weak authentication method. Other common cyber threats, including malware, such as ransomware, requires the fraudsters to also get access to login credentials in order to access IT systems and with sensitive data, and that is where YubiKey indirectly protects. We do not protect against denial of service attacks. If phishing and account takeovers are involved in 90% of all cyber breaches, why are not everyone using technologies that stop these attacks? The answer is that historically, great security has come with usability trade-offs.
Software authentication in the form of static passwords, mobile apps, or SMS, do not offer enough protection against the modern phishing and man in the middle attacks. The more secure hardware technologies, such as legacy, traditional smart cards, these are too costly and too difficult to deploy and use at scale. Yubico changes this by inventing the YubiKey. It only takes a few seconds to register a YubiKey with a supporting service. The user enters a PIN or a password and inserts the key into computing device or, and then touch it, or simply taps the key to a mobile device using NFC, and it can be even easier. Some service providers that have made support for the FIDO standard and YubiKeys only ask the user to register and authenticate once.
You don't need to use your YubiKey until you set up a new account, computer, or phone. It just works far easier than even using a username and password. Through the open standards we create, we helped create and by combining multiple authentication protocols on one single device, you can use the YubiKey to secure access to more than 800 leading business and consumer applications, and this number is rapidly growing. After Google deployed YubiKeys for all their staff, they published a report with the best results ever in cybersecurity. After 350,000 account hijacking attempts, phone apps, SMS, secondary emails, and phone number methods were all breached, but not one single account was hacked using the YubiKey.
YubiKeys also improved productivity, as they were 4 times faster to log in with compared to their previous mobile authentication app. By giving every employee a backup YubiKey, Google enjoyed a 92% support reduction and more than $50 million, $50 million in cost savings. The YubiKey experience is not just the YubiKey hardware devices that we offer in different form factors, but also a broad range of software features, certifications, integration solutions, and proprietary enterprise and logistic services. We sell our products online, direct to business, to businesses and through local distributors and resellers as a one-time cost or as a subscription service. We proudly manufacture all our products in Sweden and the U.S. with cutting-edge automation and security processes. YubiKey protects organizations of all sizes.
We often land a new customer by securing the most sensitive accounts, mobile restricted environments, such as call centers and shared workstations. From there, we expand to a broader set of employees, third-party contractors, and end users. When comparing YubiKeys with one-time password apps, traditional smart cards, Microsoft Windows Hello, and FIDO built into Apple and Google platforms, of all these authentication methods, Yubico has the advantage of requiring additional hardware. As you see in this chart, also cover many security, usability and privacy use cases where all the other technologies fall short. Yubico's biggest competitor is today, username and password, used for the vast majority of all logins. An analyst firm has estimated the multi-factor market to grow from an estimated value of $13 billion in 2022 to $27 billion by 2027, with a growth rate of 15.6%.
I'm now going to hand back the word to Mattias, who will share why Yubico is growing faster.
Thank you, Stina. I'll start before getting into the numbers to try to translate some of the industry trends that Stina mentioned into how they had an impact in the second quarter. I'll start by highlighting, unfortunately, that there is an increasing cyber threat. We're all aware of that. It ranges from individuals to even nation-states. This means that more and more users become aware of this threat and the need to mitigate those risks. One of the ways that we saw this in the first quarter was that we saw a lot of business from industry sectors where we traditionally haven't had a lot of sales. Two that we highlight in the quarter report are that we saw orders from the telecom industry and system integrators.
System integrators in particular is interesting since that also potentially provides access to a lot of follow-on business as they work on with different enterprises in deploying YubiKey. We really appreciate that they start using it internally as a route to market. We also see it in increased e-com sales, that was supported by different news articles. We saw, for instance, a very strong recommendation from The Wall Street Journal to up your up your security to ensure you don't have account takeovers. That, of course, is boosting sales, which is important for the long-term sales growth of the company. We're also very happy to see that we're able to be an influencer in this space, not just about sales.
It's about influencing so that we have wise decisions made by authorities, that enterprises become aware of this, and that we're working in the industry to promote strong standards. With governments to ensure that those are enacted. We highlight two examples of ones that we were invited to a symposium hosted at the White House, together with major industry players, promoting strong authentication. We've also become part of an initiative of an important project supported by the European Commission, the EU Digital Identity Wallet. These projects are important to ensure that users across the U.S. and the EU get access to strong authentication, phishing-resistant authentication. Stina's talked some about the fact that we, when currently, when appropriately deployed, we see zero account takeovers and the ease of use.
One area where we invest a lot of engineering and development resources is in ensuring that this is also easy to deploy. An important example of that is that we're working closely with the FIDO Alliance, and specifically, we are set to launch a pre-registration service together with partner during the second half of the year, and this is important to ensure that this is easier to deploy and manage for enterprises. Right. Turning then from kind of the high-level trends, and our participation there. The final thing I want to mention, as Stina said, she and Jakob have now moved to Sweden, and we're already seeing an impact based on their activity in Sweden, with an increased interest from companies, banks, government agencies.
It's quite visible that you, we can have a direct impact based on our activities. How does that translate into the business then? Well, we'll talk a little bit about financials. I'll start by highlighting some of the key numbers that we had in the first quarter. First one is net sales, of course, we saw an increase there of about 23%, 16%, measured in local currencies. Just as a reminder, the majority of Yubico sales is in U.S. dollars. There's some of it in euros, but the major, vast majority is in U.S. dollars, so there's always going to be an FX effect.
That also meant, since we even improved our profit margin, sorry, our gross margin a little bit, that we had a strong increase in gross profit, about 25%, compared to last year. We saw a very healthy increase in our profits. Measured as EBIT, we reported about SEK 101 million in profits for the second quarter this year, which is up by some 63% compared to the second quarter last year. Final comment on this slide would be to talk about subscription.
Just as a reminder, as Stina said, we are selling still a YubiKey as a standalone perpetual purchase, but an increasing amount of our enterprise customers are choosing to buy it on a subscription basis, which is in the shape and form of recurring revenue, so we always want to report that to provide a good transparency on our sales. Last quarter, the subscription share of our net sales was approximately, well, was 13.7%. Thank you. I just want to highlight something which we guided on when we released the first quarter result. As a reminder, the typical pattern that we see over years, that we see a very strong sales growth during the second half of the year.
In 2022, we had an outlier with the, by a wide margin, the biggest order in the company's history from one individual customer. That means that it, as measured by the quarter, our bookings were decreased by 29% because of that outlier in the second quarter in 2022. We're still very comfortable and we're tracking according to plan, and we look forward to seeing that strong growth again in the second half of the year. High level, I would then want to hand over to Camilla, Yubico CFO, who will go more into the details of numbers.
Thank you, Mattias. Yes, I will comment a bit on the numbers over time as well. We can see that the second quarter confirmed our growth, the growth trend here, as you see, with the 23% growth in the quarter and 25% year- to- date. We see also the FX effects here that are actually declining. Looking at the difference between the growth in local currencies and the absolute numbers in Swedish krona, we had approximately 7% of the total 23% is allocated to local currency, sorry, FX effects. Year- to- date, that is 8.4%. We're seeing this decreasing effect from that, actually, so it's more true growth as well.
When it comes to net sales is, the, our geographies, looking at, where, where we sell, throughout the world. All the geographies we are measuring, as you have seen in the report, we are dividing this into the Americas, EMEA and APJ. Interesting to see, or we're happy to see that the Asia Pacific region is actually doubling its net sales in Q2. Q1 had a good development. It's good for us to see or have to see that, based on the last year's investment in activities we have done in that region. It's very positive. Then on the ARR side, generated from our subscription services, we see also that we are steadily growing that, the net ARR that we have, and 55% year-on-year growth.
Also that we added SEK 23 million in the quarter and 38 million since the start of the year in net new ARR. Looking at our profit over time, we also see here that we are confirming our positive trend. The EBIT, as Mattias said, SEK 100 million in the quarter, with a margin of 22%, a growth of the profit of 63%. This improvement is basically generated from, of course, the revenue growth, that we keep up the stable gross margin, and thereby we can really see the scalability effect in this business. Also, as we have almost all our sales in US dollar and net effects, I would say like 70%-75% in US dollar. Of course, this affects our numbers when we're converting into Swedish krona.
When you read the report and you see in the income statement, there are two lines I just would like to highlight for you to, to, to also be able to value the development. They are other operating income and other operating expenses. We see in this quarter, the net of those added SEK 13 million to the profit. Last year, it added SEK 26 million, so it's, it's affecting quite much. That is, of course, yeah, that's the situation that it is. Just a brief comment then on the cash flow.
This quarter, we show an operating cash flow on minus SEK 27 million, in the quarter. There is-- we are binding more in working capital, so we increased the working capital by SEK 123 million, this quarter. This is primarily then related to the inventory build-up that we are doing right now. After a quite tight 2022, we have, have a strategic decision to secure our components and shorten the lead time for the delivery to our customers. Thereby, we are investing in both components and ready-to-ship inventory. In the first half year, we have actually invested SEK 185 million in cash, in increased inventory, whereof SEK 67 is related to this, this quarter.
Otherwise, going forward, or downwards here, we have a cash position in SEK 416 million at the end of the period, and we have a net cash position of SEK 370 million at the end of the period. As you see, that is substantially more than a year ago, generated from the business. By that, I leave over to Mattias again to summarize a bit.
Thank you, Camilla. I would summarize it as that we're well positioned for continued growth. As I hope you can agree, the business is performing well and in line with our guidance that we provided last quarter. In particular, I want to highlight the strong gross margin, 86%, and EBIT profitability of about 22%. It's also encouraging, looking into the sales for the rest of the year, that we have broadened our customer base and we have a healthy sales pipeline. I'm super excited about the new product and business development initiatives that are on the way, and I'm confident that that will further accelerate adoption and sales. The underlying trend is there. Cybersecurity is, has never been more important than today.
With that, Henrik, perhaps if you would like to comment on the next steps in terms of closing the transaction.
Yes, thank you. Before leaving over for Q&A here, some dates just to be mentioned. We will have a company description published, that will be in September 12. We have the tentative date of 19th of September. That is the last trading of ACQ on the Nasdaq Stockholm. That will, of course, mean that the day after this, the, the new share or the Yubico share will be listed on the Nasdaq First North Growth Market. Consequently, before Q&A, this is actually the last report from ACQ, if everything will go according to plan. Just having said that, I leave over for Q&A, and I think, Mattias, you will run that show.
If you wish to ask a question, please dial star five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial star five again on your telephone keypad. There are no more questions at this time, so I hand the conference back to the speakers for any closing comments.
Right. We received some questions online that I'd like to bring up. The first question is, could you put more color on the increasing profitability and where it comes from?... increasing ARR, where is the most operating leverage coming from? I'll start, and then I'll, I'll hand over it to Camilla for, for further details. As Camilla mentioned, fundamentally, it's about the fact that we have a scalable business. Our costs are not growing at the same rate as our sales growth. Of course, we have increased the size of the organization, that there are some increase in the operating costs, but it's far less than the increase in net sales. Actually, the increasing ARR is, has a, has a counter effect.
Just as a reminder, when we sell on a subscription basis, we don't recognize the revenue upfront as we would if sold on a perpetual basis. Instead, subscription revenue are recognized throughout the duration of the contract, which is typically a three-year period. However, most of the costs associated with the direct costs associated with subscription are upfront as we deliver the YubiKeys. Short term, subscription would have a negative impact on our profitability compared to perpetual sales. Over the duration of the contract, the total profitability on, on an account basis is very similar, but short term, there would be a negative effect from increasing subscrip- from subscription sales. When the fin- the final part of the question, where is the most operating leverage coming from? I'll, I'll... I don't know if you wanna comment on that, Camilla.
Yes, I can do that. Of course, this varies over time a bit when you grow as quickly as Yubico has done in the history and are still doing. When you're building up an organization, you have both the sales organization, you have, for us, very important, the engineering team, developing everything that we are actually doing, which are the, I would say, the biggest part of our business, in this. Of course, here you see some scaling, but we also see that we need to really keep to continue investing those, those categories here also for build for the future. Right now, we see that we are getting the benefit for the, from the investments that we have done the last years in, in these categories.
We are, yeah, so basically, it's scaling, but it's not a scaling that will continue forever, so to speak. Of course, we will need to continue to build also on, in the operation, but not at the same speed. That, that, I, I think it's probably as much as we, we can say. There's no magic, and no specific things, and, and no, cost, activities or anything like that. It's a healthy business scaling.
Thank you, Camilla. The next question is actually posted in Swedish, but, ""... 5%-15% in EBIT for 2023. Do you think that the margin will go down significantly in H2 compared to now at 19.9% per H1?"" I'll, I'll attempt to translate it. The guiding remains at 5%-15% in EBIT for 2023. Do you anticipate that the margin, the gross margins would-- sorry, the margins would, decrease significantly in, in second half of the year compared to the first half of the year? My response to that is, yes, it's true that we retain our guidance.
As, as we indicated when, when we presented the guidance in April, sorry, in May, earlier this year, the key deciding factor for, for the, where in the, in that, range the margin would end up is, was the share of subscription sales. During the second half of the year, there are some industry verticals that are typically very active that would have a higher percentage of subscription sales. We may see a somewhat lower profitability in the second half of the year compared to the first half of the year. However, I'm very confident that we'll reach this guidance to 5%-15%, and it's not unlikely that we'll be in the upper part of that range.
I don't see anything significant that would decrease profitability for the second half of the year other than the, the, the impact of, of subscription sales. There are some things in terms of operating costs that have a, kind of a natural impact in the second half of the year. For instance, when it comes to our sales costs, commissions are constructed in a way which means that you hit accelerators as you meet your quota, which means that the sales cost percentage for sales is typically higher in the second half of the year. There are small impacts that, that would typically lead to lower profitability during the second half of the year, but nothing, nothing major. We also got a new question, very similar to the previous one. "Good morning.
Congratulations, a great report." Thank you so much. "Gross margin over 85%. This is really good. Is it sustainable?" That's a great question. Yes, we think that the gross margin in excess of 85% is sustainable. I don't know if I can share a story. When I first joined the company 13 years ago, Stina and I had a discussion about this, I was adamant that, "Oh, margins will go down over time." At that time, I think we had 70% margin, Stina was adamant that, "No, we'll be able to retain and increase our margins," I'll have to actually admit that Stina was right there. The reason why we could do that is the gross margin measures the direct cost as we manufacture and produce YubiKeys.
The big investment that we've been making over the years and continue to invest in software development is not captured by the gross margin. That's where we need to continue to invest to be able to maintain good sales growth and good gross margins. Yeah, I don't see any more questions at this time. With that, I guess we can wrap up this call. Thanks, everyone, for attending, and please feel free to get in touch with us with any additional questions and comments. Deploy YubiKeys. Thanks, everybody.
Thank you. Thank you.