Pexip Holding ASA (PEXIP) Earnings Call Transcript & Summary

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 at Lysaker, I have Oystein Hem, our CFO; and Åsmund Fodstad, our Chief Revenue Officer. Together, we will take you through the highlights of the quarter. The standard disclaimers apply as usual. First, a brief overview of Pexip for those new to the company. Pexip was founded in 2012, and currently, we operate in 25 countries across the globe. We are a secure video meeting and video infrastructure company, delivering software and Software as a Service. Pexip has unique and established partnerships with the leading companies in our industry. We complement and enhance their solutions and do not generally directly compete with them. Our customers are mainly large organizations, both in the private and public sector that have specific needs when it comes to interoperability, security and data control. The financial performance has been strong and has been continuously improving over the last quarters. Now to the highlights of the past quarter. Our annual recurring revenues continues to grow. And this quarter, we grew with $5.2 million, and this gives us an ARR base leaving Q2 of $140 million. In Q2, we had continued strong growth in our Secure and Custom business area with new ARR of $4.9 million coming from this area. A large part of this came from defense and national security, which is a core segment to Pexip, and I'll come back to that. Connected Spaces also grew slightly in the quarter, which is good to see. EBITDA came in at $7.2 million and cash flow ended at $8.1 million. If we look at our second quarter performance in the context of the last 12 months, we see that the positive trend from the previous quarters continues. Our total ARR continues to grow and year-over-year, the growth rate was 18%. Our 12 months rolling EBITDA reached USD 40 million, which is a 60% improvement since second quarter last year. This corresponds to a 31% EBITDA margin. And finally, also our free cash flow continues to grow and ended at $38 million for the last 12 months. We do take this performance as evidence that we are operating in attractive markets with relevant products and a strong market position. As most of you know, Pexip has 2 main solution areas: Pexip Secure and Custom, which is about privately hosted video meetings that give complete privacy and data control with the desired level of customization; and Pexip Connected Spaces, which is about video meeting interoperability by enabling any meeting room to connect to any meeting platform. Now a few words about each business area. In Secure and Custom, we are targeting a segment of the video conferencing market that is largely unserved by the major players like Teams, Zoom, Google and Webex. The market is growing fast. And currently, we estimate an addressable annual market for Pexip of above USD 1 billion. We are catering to those organizations that have limitations with respect to use of global cloud platforms such as Azure, GCP or AWS and consequently have a need for their video conferencing software to run in controlled IT environments, either self-hosted or in private or sovereign clouds. Pexip's technology is very well suited for these use cases due to its deployment flexibility, open interfaces and modern user experience. As a result of this clear market focus and recognized competitive advantages, 57% of Pexip's recurring revenues are now linked to customers deploying Pexip in self-hosted environments or dedicated sovereign clouds. This is a combination of our secure and custom customers and a number of self-hosted software customers using Pexip mainly for interoperability. One such example is organizations using Pexip in combination with Teams in closed U.S. Government Microsoft clouds. Going forward, we do expect the 57% to increase as more on-premises and sovereign infrastructure is built for organizations with specific requirements for security and data control. Defense is a key segment for Pexip and currently around 15% of Pexip's total ARR is linked to defense and national security. Pexip is mainly used for secure video meetings or interoperability in dedicated IT environments. But recently, we also see positive developments in tactical use cases where Pexip is used out in the field. Increasingly, video is used for better situational awareness through transfer of live video streams from drones into mobile command centers, armored vehicles, tanks and even all the way back to headquarters. Pexip's technology works really well in these scenarios, and we're constantly expanding our partnerships and position in this ecosystem. Let me hand it over to my colleague, Nick Ross, Director of Defense and National Security and former reconnaissance operator in the British Army to explain a bit more. [Presentation]

Thank you Nick. Now moving over to another key focus area for Pexip, namely AI. Organizations with strict requirements for data control would also like to have access to AI functionality, but deployed in their approved environment. Video meetings constitute an important input source for any AI productivity tool and Pexip as a self-hosted meeting platform can enable advanced private AI capabilities. Pexip can privately and securely exchange relevant meeting platform information to a completely private LLM on the customer's network. For example, Pexip Meetings can connect to and use Google Gemini self-hosted and keep all data fully within the organization's own control. Another key area of AI application in Pexip is building customer-specific integrations and video applications. Pexip is uniquely flexible to integrate and adapt to fit with specific use cases. AI significantly lowers the cost and complexity to write such custom integrations, which is a real amplifier on our API-based architecture. Now to Connected Spaces, a part of the video device software market that we estimate to around $1.4 billion annually. Here, we deliver solutions to connect any meeting room to any meeting platform. In close partnerships with Google, Zoom and Microsoft, we have a unique market position and provide the most comprehensive suite of interoperability solutions in the market. The latest addition to the product portfolio in Connected Spaces is Pexip Connect for MTRs on Android, and this is now fully publicly available for purchase. We know many have been waiting for this, and we are in active dialogues with customers to set up pilots for testing. The first orders are also in the books. Now over to Åsmund for a more detailed sales update.

Thank you, Trond. Good morning, everyone. It's fantastic to present yet another strong quarter for Pexip, reinforcing our momentum across both Secure and Custom and Connected Spaces. Let's look at some of the details. Having a 11% year-over-year increase for Connected Spaces and adding USD 4.9 million, a solid 27% increase for Secure and Custom is a very strong statement to our technology and to our team as well improves our investment and now track record in Secure and Custom. Pexip successfully adds more and more Fortune 500 customers, large government institutions, health care, justice, Ministry of Defense and important military organizations to our customer base. Here is why Pexip is successful. We see some commonalities. The first one, the accelerated focus on data control and data sovereignty. Buyers in Europe are no longer asking whether their data can sit outside their own control. They are writing it into the requirement. That shift often makes Pexip the preferred vendor left at the end of the evaluation. Let me share a couple of large wins from this quarter. First, a European Ministry of Finance had 2 demands, full control of data and controlled user or rather citizens access. This is a strong reference case for us for every other ministry in that country and a future expansion opportunity for Pexip. Second, a European police force selected Pexip for sovereign video. For law enforcement, sovereignty is not only about where data resides, it's about protecting operational secrecy. Winning in this environment validates Pexip against some of the public sector's most stringent security and procurement requirements. And third, a European financial services firm replaced its video platform entirely with Pexip, showing that regulated industries increasingly value the same sovereignty and control as government. The second comment we see is we keep on winning in classified and mission-critical environments. These are some of the hardest environments to enter. Few vendors can operate in air gapped or classified networks. A European Ministry of Defense selected Pexip as their main collaboration platform for more than 100,000 users for both video and chat. A U.S. Army unit is deploying Pexip across separate classified networks and the European Defense Force signed a 3-year agreement for air-gapped meetings. These wins matters because the credibility creates high barriers to displacement, long-term revenue for us and natural expansion opportunities for Pexip. Let me share a recent feedback from operators in the field, underlining as Trond and we just heard Nick previously said, how well suited Pexip is across these environments. Here, Pexip powers classified video calls from aircraft carrier at sea over a secure NATO network and across multiple domains. The takeaway, Pexip is strengthening its position where security requirements are at the highest and where trusted communication is mission critical. Now let's look also at Connected Spaces. The last commonality we see is interoperability remains a strategic differentiator for Pexip. Few large organizations run a single collaboration platform. They can have Microsoft in one part of the business, Zoom in another and rooms equipment from several generations of investments. Standardizing on one vendor is expensive, slow and sometimes politically hard. So instead, they buy interoperability. That is the gap we fill. Two wins from this quarter proves it a global investment adviser rolled out Pexip across its estate. Financial services is a demanding reference, heavy compliant requirements, low tolerance for meeting failures and a long evaluation process. And as I can reference, a large and innovative automobile manufacturer selected Pexip so that Zoom Rooms can join team meetings rather than replacing the hardware, they use Pexip to bridge the two. It shows how we monetize the customers' existing investment instead of competing with it. In summary, these are the commonalities behind why Pexip are successful and keep on winning large customers around the world. And with that, I will hand over to Oystein for all the financial details.

Thank you, Åsmund. For annual recurring revenue, we increased our growth to 18%. And this quarter, it was really Secure and Custom driving the growth, growing from $59 million to $64 million and growing into 46% of the ARR base. EMEA grew the most with $3.8 million, followed by Americas and then by APAC. And as Trond commented on, Defense and National Security had another strong quarter and is now 15% of our overall ARR. Breaking down the growth into the various components. Connected Spaces saw an increase of $0.3 million. We're happy to see that net retention continues to improve and is approaching 100% also in this segment. New sales was somewhat below the usual level in Connected Spaces as the majority of large deals closing in this quarter was in Secure and Custom. That meant that Secure and Custom had both good new sales and very strong net retention. We continue to see customers growing from their initial revenue as their usage of Pexip expands and by scaling initial rollouts. This quarter, that led existing customers to have net upsell of $4 million, driving the best ever growth in dollar terms for the segment. Churn came in at $600,000, which is on average for Secure and Custom. In terms of the P&L, recognized revenue grew 18%, which is the same as the ARR growth. And this enables us to continue to improve our EBITDA, which grew 30% year-on-year. On a 12-month basis, revenue growth is slightly ahead of the ARR growth at 20%, while the annualized EBITDA margin is up to 31%, up from 23% in the same quarter a year ago and up from 30% out of Q1. That means that the sum of our ARR growth and EBITDA margin is now at 49%, well above our long-term target of 40%. Our operating expenses have a modest increase compared to Q2 of last year. On cash-based salary, we have an increase of $1.3 million, driven by salary increases as well as the NOK USD appreciation impacting our cost in Norway. Share-based expenses are in line with last year at $1.8 million and other OpEx came in at $4.2 million, slightly up from last year and slightly down from Q1. In total, that meant that of the $4.9 million in incremental revenue growth, we managed to move $1.7 million or 34% to the bottom line. That is somewhat below earlier quarters, which is partly due to the extraordinary low cost of goods sold last year. Despite of this, we continue to improve our margins, both on a quarterly level and on a trailing 12-month perspective. On cash flow, Q2 delivered $8 million in free cash flow, up from $3 million in Q2 of last year, helped by improved operating cash flow. The dividend payment had the largest impact on cash, returning $44 million to shareholders. And we exited the quarter with a cash and money market position of $45 million, and we continue to have both a robust cash position and consistent positive cash flows. On other items on the P&L, nothing stands out much. Depreciation is somewhat up year-on-year, and profit before tax is up $1.3 million to $6.9 million for the quarter. And with that, I give it back to Trond.

Thank you, Oystein. Now outlook. As described earlier, we do maintain a positive market outlook based on the key trends we see in our markets, the unique technology, strong market position and industry partnerships that we have. Our expectation is that we will end Q3 with an ARR in the range of $142 million to $145 million compared to the $140 million we had leaving Q2. Long term, our financial ambition is to consistently deliver above Rule of 40 performance across ARR growth and EBITDA margin. Last 12 months, we were at 49% on this parameter. Finally, before we go to Q&A, we will present our Q3 numbers on November 5. Now Q&A.

Thank you Trond. We'll start the questions from the analysts that are with us live. And we have Øystein Lodgaard from ABG. Øystein, can you hear us?

I can hear you. Can you hear me?

Yes, we can.

Yes. Congrats on another good quarter. I wanted to start with Connected Spaces. Here, you're, of course, having -- if you look at the year-over-year growth, that is boosted by some large deals you signed in Q4 last year. But if you look at kind of quarter-on-quarter, it's kind of flat, not growing that much. So I just wanted to understand what are you seeing in terms of the underlying development in that market? And what is your kind of view on the future quarters going ahead for Connected Spaces?

I think what we're seeing this quarter from Connected Spaces is fairly consistent with previous quarters where we've had a modest growth quarter-on-quarter with the exception of Q4 where we really had standout growth, which is, I think, a fair expectation also going forward. So to have continued modest growth in Connected Spaces, certainly compared to Secure and Custom.

So now with the Connected Teams on Android also being launched, you don't expect kind of that to drive an acceleration in the growth in Connected Spaces going forward?

It's a bit early to say in terms of what that impact will be. I think the positive results so far from that product have been good, but it's still very much in sort of proof of concept and early customer discussions. We haven't really seen enough orders to have a very clear perspective on how quickly that will adapt.

Okay. I understand. And in terms of costs going forward, you're now quite significantly above your own kind of soft guiding that you want to deliver above Rule of 40 performance, which gives you some leeway, some kind of opportunity to kind of invest more in growing your OpEx base and still being within that target. How do you look at kind of future OpEx growth now over the next couple of years?

I think we are continuing to invest in people and add resources where that is sort of seen necessary, particularly on the commercial side. We see that we have a lot of traction in the Secure and Custom area. We are successful in defense. We're doing good in health care and government. So adding specific sort of competencies like we have been very sort of successful in doing in defense, also in other areas is something we're looking at. But in general, we also see that we have savings coming, for example, from AI and productivity improvements in other areas. So it's sort of balancing out. We have communicated earlier that we think the number of employees will grow slightly through this year, maybe approaching something like 300 employees towards the end of this year. And I think that's still our ambition. But we don't see any kind of dramatic change to the OpEx base or the investment level in terms of that will increase the costs dramatically.

And from that 300 employee base at year-end, how much should we expect that to grow in the years to come?

I think that's a difficult question. We will basically be agile and adapt to how we see the market developing, seeing -- we have to go after the opportunities that are out there. And I think the sort of our biggest fear is the fear of missing out, not being able to be in all the right places at the right time. So I guess it all depends on how the markets will develop. I think you will see, as we have seen before that in some areas, we will reduce. In other areas, we will increase, whether that balance ends up with a slight increase, flat or I guess it just has to -- remains to be seen. But I'm not foreseeing any dramatic changes. It's going to be pretty predictable and easy to forecast going forward, I think.

Then we will move on to Christoffer Bjørnsen from DNB.

Can you hear me?

Yes, we can.

Great. So I just wanted to touch on the development you're expecting for ARR in the third quarter. There's no doubt that there is increasing demand for the kind of secure solutions you're offering, but you're kind of also seeing some European actors doing their own stuff internally and so on. So you've been seeing really good D-R-A DAR, let's call it DAR over the last couple of quarters, but now you're kind of guiding for a slowdown for Q3 back to the levels seen more than a year ago. So can you maybe expand a bit on what's driving that slowdown? If there's anything particular you want to call out in the quarter or if it's just like a bumpy ride and it's probably going to tick up again into the fourth quarter and beyond, hopefully?

I think this is always difficult, right? I mean giving outlook and guidance on the next quarter, I think just the headline here from our side is that we're trying to give you the best possible picture of how we see the quarter we're in. This time, we meant to give a positive view. I mean we don't see any changes to the positive trends we have seen over the last quarters. We think they will continue. The difficult part is always to judge exactly which quarter some of these deals will end in. In previous quarter, we expanded the guiding range to take this into account. We could have done that this time as well, we decided not to pretty much on the balance. It's a bit of a kind of a juggling and balancing act to give you these forecasts and this guiding. But overall, and looking at the second half of 2026 as a whole, you will see that -- our firm belief is that the trend that we have seen over the last quarters will continue at the same or accelerated rate.